Supply-based Dynamic Ramsey Pricing with Two Sectors: Avoiding Water Shortages
AbstractIn many countries, current water-pricing policies are dictated by the sole objective of breaking-even in each period. This results in large withdrawals, which are not sustainable in the long-run, hence not optimal. In this paper, I derive the optimal dynamic water resource management policy of a benevolent government, which supplies water to households and agriculture. I compare the efficiency implications of the current and the optimal pricing policies using simulations. I endogenize crop-choice decisions and estimate the changes in the crop composition with the generalized method of moments. Using data from Turkey, I nd that, under the policy of break-even prices, the average number of years before the government runs into the water shortage, when it cannot meet the sectoral demands, is eight years. In contrast, if the government were to choose water prices optimally, then water shortages would be practically nonexistent over the next century.
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Bibliographic InfoPaper provided by Victoria University of Wellington, School of Economics and Finance in its series Working Paper Series with number 1534.
Date of creation: 2011
Date of revision:
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Postal: Alice Fong, Administrator, School of Economics and Finance, Victoria Business School, Victoria University of Wellington, PO Box 600 Wellington, New Zealand
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Fax: +64 (4) 463-5014
Web page: http://www.victoria.ac.nz/sef
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Ramsey Pricing; Water Shortages; Water Pricing; Dynamic Programming; Irrigation;
This paper has been announced in the following NEP Reports:
- NEP-AGR-2011-08-09 (Agricultural Economics)
- NEP-ALL-2011-08-09 (All new papers)
- NEP-ARA-2011-08-09 (MENA - Middle East & North Africa)
- NEP-CMP-2011-08-09 (Computational Economics)
- NEP-CWA-2011-08-09 (Central & Western Asia)
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