Group 25, Student IDs: U2008950, U2008960, U2041900, U2066667, U2054113

Water Scarcity- The Next Global Crisis

Executive summary

Water is the elixir of life and is fundamental for the survival of all living organisms. One of the
major challenges facing the world today is ensuring there is an adequate supply of water amid the
proliferating human and ecosystem needs and growing climatic changes which all impact the
availability and demand of water (United Nations, 2006).

Existing policies targeted at mitigating water scarcity include supply and demand management
policies. Despite having the potential to reduce water scarcity, supply management policies have
been shown to harm natural ecosystems within their local area, which could limit their application
within communities close to fragile ecosystems. On the other hand, demand management policies
can incentivize better water usage. To properly ensure efficient usage, this policy brief advocates
for the introduction of a better water pricing model and the use of water efficiency labels.

Context and importance

Growing populations and inefficient usage continue to place pressure on surface and groundwater
sources. If effective policies are not put in place, it is estimated that 47% of the world’s population
will be living under severe water stress by 2030 (United Nations, 2014).

The rapid growth in water scarcity can be explained by the growing demand from competing users
in the economy and a lack of proper institutions. Appropriate institutions are needed for the
management of the resource, raising awareness of the crisis, and promoting behavioral change
towards more sustainable practices.

Population growth and changes in quality of life have all contributed to increases in the demand
for this finite source. Agriculture and industry account for 70% and 19% of the world’s fresh water
usage and changes in consumption have meant that the demand from households grew 600% from
1960-2014 (Otto and Schleifer 2020). Existing freshwater supplies are also under pressure from
climate change and water quality degradation. Thus, within some countries, the expanding demand
and fluctuating supply can aggravate water scarcity.

In societies where there are inadequate institutions to promote efficient use, there is likely to be
over-exploitation. In Punjab, India, groundwater abstraction is considerably higher than mean
annual rainfall (Mishra et al, 2018). With the absence of pumping limits or other rationing
institutions, the water users are stuck in a prisoner’s dilemma scenario in which all would gain by
reducing their abstraction levels but none has an individual incentive to pump less (Zetland 2020).
Thus, fundamental to the problem of inefficient water usage is the lack of proper guidelines that
are needed to incentivize better water management.

Mitigating water scarcity is crucial, as it is estimated that severe water scarcity could cost some
regions up to 6% of their GDP (World Bank, 2016). The lack of clean water and proper sanitation
is estimated to cause the death of over 800 children every day (Hunter, 2017). The loss of the
young population could lower the human capital stock of countries and preventing future economic
development.

From a political perspective, water scarcity could harm diplomatic relations. Within the Nile basin,
only six of the ten countries exploiting the Nile river have acceded to “the Entebbe agreement”
through which the countries agreed to fairly share the river’s water supply. (Di Nunzio, 2013). If
water scarcity increases, these countries would be forced to extract more water from the river,
resulting in conflicts. Such conflicts could propagate into long-term disagreements which can harm
bilateral trade within the region, thus compromising economic growth.

Critique of policy option(s)

Existing policies to address water scarcity include supply and demand management options.
Supply management includes investment in water infrastructure and advancements in water
treatment facilities, such as the desalination of seawater. Demand management involves
improvements in water-use efficiency including the use of more efficient production technologies
and reducing water demand through lifestyle changes related to food and energy consumption
(Kahil, et al, 2019).
Investments in water retention projects have been implemented worldwide. In China, the building
of the Three Gorges Dam has enabled operators to mitigate seasonal water scarcity by varying the
flow of the Yangtze river between dry and wet seasons. However, the construction of the dam has
been criticized for lowering the river’s water quality, mainly due to the buildup of sediment. The
substandard water quality has decimated aquatic habitats, threatening the survival of ancient
endemic fish species such as the Chinese Sturgeon (Wu et al, 2004).

Moreover, water treatment facilities such as desalination plants help to increase the water supply,
by converting seawater into drinking water. However, the desalination process creates brine, which
is often dumped into the sea. Since brine is 1.3-1.7 times more concentrated than seawater, its
presence may harm organisms such as crabs and sponges that live on the seabed, which can distort
the entire aquatic food chain (Sadhwani et al, 2005). Because of this, economic activities such as
commercial fishing and tourism could diminish. Hence imposing an external cost on local
communities who rely on the fish ecosystem for their livelihoods.

Due to the aforementioned environmental implications of supply management, there is a need for
a stronger focus on demand management policies. Within agriculture, policies such as the use of
drip irrigation technology have been encouraged, which could help reduce excessive water wastage
by placing water directly at the roots of the plants (Nikolaou et al, 2020).

However, farmers might not quit their traditional, water-intensive irrigation methods unless the
new technology provides a relatively higher net marginal benefit. To encourage this shift, we
propose the use of an appropriate water pricing structure that can increase the marginal cost of
water-intensive irrigation methods.
Policy recommendations
To impose a credible punishment on inefficient users, this policy brief advocates for the
introduction of a better pricing model. In addition, a strategy of water efficiency labeling is
recommended which can promote changes in customer buying patterns, thereby promoting a
habitual tendency to save water.

Water pricing can only be applied to excludable forms of water. This includes private metered
water and distribution networks, whose use can be restricted by the utility provider (Zetland, 2021).
Thus we will focus on pricing these types of uses and will look at their impact on firms and
households.

As the price of water is raised, the cost of water will increase for firms within water-intensive
industries such as agriculture. Highly water-inefficient firms will be forced to exit the market or
to innovate new technologies that produce goods of the same quality but using less water, thereby
promoting efficient water usage.

Households use water for (i) high-value uses such as drinking and bathing and for (ii) lower-value
uses such as landscaping. Fig.1. shows the households' marginal value of water(price) against the
quantity consumed. The blue curve differentiates high and low value uses of water. Users have a
higher willingness to pay for high-value uses and can be interpreted as having a lower elasticity
(responsiveness) to price changes.
 Adapted from (Zetland, 2020, pp 4)
Figure 1 shows that users start by allocating water towards higher-value uses but this changes to
lower-value use as consumption increases. By increasing the price from P1 to P2 households’
lower value uses can be reduced from Q1 to Q2 and thus encourage efficient water consumption
daily.

Our proposed water pricing structure aims to equate the price charged to the marginal consumer
equal to the marginal cost of water provision. The first step is to find the utility’s marginal cost of
water provision. In this case, the marginal cost is as follows:

MC = Marginal distribution costs + Marginal administration costs + Scarcity surcharge

In addition to the marginal distribution and administration costs, it is necessary to include a scarcity
surcharge. The surcharge is an estimate of the full incremental cost of producing more potable
water such as by desalination, beyond the utility provider’s present output, so that consumers are
conscious of the scarcity value of the water. The value of the surcharge should vary to reflect
existing scarcity levels in the region. Lastly, the price charged at each quantity level is equated to
the marginal cost.

Adapted from (Zetland, 2020, pp 5)

Figure 2 shows the red supply curve Q(S) which depicts the proposed pricing structure. Q(S) is
vertical at Q2 and has a positive slope after the price P2. The quantity from zero up to Q2 represents
a cost-free ‘grace’ quantity of water to accommodate low-income users. The rising portion of the
supply curve aims to reflect the increasing opportunity costs of water consumption, to incentivize
users to limit their consumption to only higher-value uses.

In times of severe drought, the scarcity surcharge could be increased, this is represented by the
shift in the supply curve to Q(S)’. There would be a corresponding decrease in the quantity of
water consumed from Q1 to Q2, easing the pressure on water sources.

There is, however, the possibility of a secondary market forming. By extracting water from
common aquifers, private vendors may supply water illegally to the customers at a lower price.
This could reduce the effect of the proposed pricing model on consumption and exacerbate
groundwater depletion. Besides this, in certain countries like India only around 50% of households
have functioning water meters. The unaccounted water is charged at a fixed rate which does not
vary with quantity consumed, and thus does not incentivize large users to consume less. (Goyal et
al., 2021 pp 18).

Hence, pricing is necessary but not sufficient to ensure efficient water usage. In addition to using
pricing to punish high water consumption, users must be offered better choices when it comes to
finding good substitutes for water-intensive products. The policy of water efficiency labeling aims
to do this by providing households with better information regarding the water usage of common
accessories, thereby prompting them to shift to water-efficient products.

The scheme starts with the development of appropriate standards by an independent committee.
The pre-set standards are then used to examine product prototypes involved in the water
distribution. This committee then assigns an appropriate rating for each product based on its
efficiency. Ideally, annual reviews of the standards should be performed to assess whether the
minimum standards must be changed.

The policy focuses on household accessories such as showerheads and faucets, intending to
encourage the use of the most water-efficient accessory. As customers begin to buy products with
the highest rating, this encourages producers to compete in developing and maintaining a high
water efficiency standard for their products. This can help reduce household water wastage, and
on an aggregate level can reduce water scarcity.
For the scheme to promote informed behavioral change, consumer awareness and proper education
is crucial. In India, the majority of households are unaware of the water fitting specifications, such
as the flow rate and desirable water pressure (Goyal et al., 2021). This fails to create the demand
necessary for producers to adopt the labeling scheme. However, this problem could be reduced by
undertaking awareness campaigns, showcasing the benefits of using water-efficient accessories,
which can nudge households to change their behavior (Holland, et al, 2019).

In summary, the success of the two policies largely depends on the existing institutional
capabilities. Being able to ensure proper meter coverage, preventing the rise of illegal water
trading, and raising awareness of the benefits of water savings are some of the key institutional
roles that governments must maintain, to ensure the success of these policies.

Conclusion
Water scarcity poses a threat to the socio-economic progress of humanity. Severe water scarcity
could exacerbate political conflicts between nations and the lack of proper sanitation and clean
water supply could result in the loss of valuable human life. The implementation of policies to
expand freshwater supplies involve sacrificing environmental integrity, restricting the policy’s
applicability. This policy brief has shown that demand management policies are the key to
avoiding severe water stress. There has been a proposal for a more efficient water pricing system
and the use of water-efficient labeling. These policies can help to avoid a disastrous future in which
water is a scarce commodity, by helping to change consumer and firm water-usage habits.
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