THE ECONOMIC IMPACT OF RESTRICTED WATER SUPPLY: A COMPUTABLE GENERAL EQUILIBRIUM ANALYSIS

Maria Berrittella, Katrin Rehdanz, Arjen Hoekstra, Roberto Roson and Richard Tol

No FNU-93, Working Papers from Research unit Sustainability and Global Change, Hamburg University

Abstract: Water problems are typically studied at the level of the river catchment. About 70% of all water is used for agriculture, and agricultural products are traded internationally. A full understanding of water use is impossible without understanding the international market for food and related products, such as textiles. The water embedded in commodities is called virtual water. Based on a general equilibrium model, we offer a method for investigating the role of water resources and water scarcity in the context of international trade. We run five alternative scenarios, analysing the effects of water scarcity due to reduced availability of groundwater. This can be a consequence of physical constraints, and of policies curbing water demand. Four scenarios are based on a “market solution”, where water owners can capitalize their water rent or taxes are recycled. In the fifth “non-market” scenario, this is not the case; supply restrictions imply productivity losses. Restrictions in water supply would shift trade patterns of agriculture and virtual water. These shifts are larger if the restriction is larger, and if the use of water in production is more rigid. Welfare losses are substantially larger in the non-market situation. Water-constrained agricultural producers lose, but unconstrained agricultural produces gain; industry gains as well. As a result, there are regional winners and losers from water supply constraints. Because of the current distortions of agricultural markets, water supply constraints could improve allocative efficiency; this welfare gain may more than offset the welfare losses due to the resource constraint.

Keywords: Computable General Equilibrium; Sustainable Water Supply; Virtual Water; Water Scarcity (search for similar items in EconPapers)
JEL-codes: D58 Q25 Q28 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2006-01, Revised 2006-07
New Economics Papers: this item is included in nep-agr and nep-cmp
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Citations: View citations in EconPapers (61)

Published, Water Research, 42, 1799-1813

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