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Welfare Implications of Water Scarcity: Higher Prices of Desalination


  • Yiğit Sağlam

    () (Victoria University of Wellington)


In this paper, we evaluate the welfare implications of shortages in renewable resources, and investigate the effects of cross-subsidization on these shortages. We set up a stochastic dynamic programming model in which a benevolent supplier allocates the resource for multiple user groups subject to revenue and resource constraints. The supplier also has access to an external source that can be utilized at a certain cost. The solution to the model gives the “optimal” sectoral prices, and demand for the external source. We find out that saving budget surplus during periods of scarcity allows the planner to charge prices below average costs when the resource is abundant. Using data from Turkey, we simulate our dynamic model to quantify the implications of cross-subsidization on water use across user groups.

Suggested Citation

  • Yiğit Sağlam, 2019. "Welfare Implications of Water Scarcity: Higher Prices of Desalination," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(4), pages 995-1022, August.
  • Handle: RePEc:kap:enreec:v:73:y:2019:i:4:d:10.1007_s10640-018-0284-2
    DOI: 10.1007/s10640-018-0284-2

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    References listed on IDEAS

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    More about this item


    Renewable resource; Water shortages; Stochastic dynamic programming; Desalination; Cross-subsidization;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water


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