ECON 310 Chapter 15 Notes

Water Resources

We never know the worth of water until the well runs dry.

English Proverb

CHAPTER SUMMARY

In the United States, water has been viewed as an abundant resource and therefore its use has not been managed to prevent or mitigate increasing scarcity. Four distinct problems have arisen that affect the availability of water. In many areas of the country the use of water exceeds the rate at which it is being replenished. Many activities use water as an input, and when the water is returned to surface or groundwater, its quality is diminished. And many activities use surface or groundwater as a means to dispose of waste, creating water quality problems. Finally, degradation of ecosystems weakens their ability to store water and modulate the drought/flood cycle.

The hydrological cycle is an important concept in examining water use. The hydrological cycle refers to the movement of water from the atmosphere to the ground and then its evaporation and return to the atmosphere. Water vapor in the atmosphere condenses and falls to the ground in some type of precipitation (rain, snow, sleet, etc.). Some of the precipitation lands directly in surface water and some on land. In the United States, on average, 66 percent of the precipitation returns to the atmosphere directly by evaporation; 31 percent runs off to rivers, streams and lakes; and 3 percent seeps underground.

Forests and other terrestrial ecosystems play an important role in the hydrological cycle. Leaves and stems break the impact of the rain, slow its descent and allow more moisture to be absorbed into the ground. The net effect of the forest is to allow more of the rainwater to become ground water and less to immediately enter streams or rivers. Wetlands play a similar role in modulating the drought/flood cycle.

The nutrient cycle refers to how the basic nutrients (nitrogen, potassium, and phosphorous) move through the ecosystem. When organisms die and decay, the nutrients are released in the soil or water and become available to plants, which absorb them. The plants are then eaten by other organisms that absorb the nutrients and the cycle continues. Problems arise when additional organic wastes from human activity are introduced into the ecosystem.

Processes that break the wastes down into basic nutrients remove dissolved oxygen from the water. Dissolved oxygen is essential for aquatic life. Nutrients can contribute to algae blooms that block light from penetrating the water. When the algae die, their decay further contributes to the decline in dissolved oxygen. If all the oxygen is depleted, then the decay process shifts from bacteria that operate in the presence of oxygen to bacteria that operates in the absence of oxygen. This decay leads to the "rotten egg" smell associated with polluted waters. Agricultural run-off, suburban run-off, paper plants, food processing, stock yards, and discharge from sewage treatment plants are among the most significant anthropogenic sources of nutrients.

Within the resource taxonomy there are three categories: renewable resources, in which the stock regenerates itself, resource flows, where a never-ending flow comes from a nondepletable stock and exhaustible resources. Water, in general, meets the definition of a renewable resource. The evaporation from the oceans and other water sources creates the precipitation that replenishes the oceans. Water in riverine systems can be viewed as a resource flow.

Some water resources can be viewed as exhaustible because the rate of growth of the stock is small in relation to the use of the water. "Fossil water," which is water that has accumulated slowly in underground aquifers over millions of years is an example of an exhaustible resource. The Ogalla Aquifer, which underlies eight midwestern states and western states, is a good example.

If the flow of a river is much larger than the withdrawals of water to meet consumptive and productive needs, and if uses of water are benign, then there will be no resource allocation problem, even if the water is avail- able at zero cost. However, if the flow of water is not capable of meeting all needs at any point in time then a shortage will develop. At a price of zero, quantity demanded of water is greater than amount available. As price rises, the least valuable needs will be left unsatisfied. If price is continually raised, eventually quantity demanded will equal the amount of water available.

Figure 15.1 illustrates how essential scarcity is in determining price. In this figure, g_o represents daily flow, where the cost of extraction is still zero. As D moves from D1 to D3 the ability of flow to meet needs changes. At D1, all needs can be met. At D2, there is unsatisfied demand at zero price, price rises to P2. At D3, the price rises again to reflect shortage at zero price and P3.

Property rights must be well defined in order for a market and a price to exist. Price will also reflect the marginal cost of producing water. The cost of producing water takes the form of purification, transportation, etc. If property rights are not well defined or other conditions result in market failure, then the price will be too low and this will lead to shortage as illustrated in Figure 15.2.

In eastern and Great Lakes states, water resources can be viewed primarily as resource flows, where most cities and agricultural areas depend on surface water or groundwater that is generally replenished by normal rainfall. One mechanism that often leads to urban water problems is the process by which water is priced and distributed to customers. This is usually done by either a regulated water utility or a municipal water company. In both cases there are political or regulatory forces that push the price of water below its opportunity cost.

When water is provided by a regulated monopoly, the monopoly is allowed to charge a price that yields a reasonable rate of return on their capital investment. The scarcity value of water is not incorporated only the scarcity value of the other inputs. If the price of water is below the opportunity cost, a shortage will develop. There is no means to reflect the higher valued uses for the water.

Alternatively, if a city elects to provide distribution of water as a city service, political pressures may keep rates low, again allowing no mechanism for reflecting the value of alternative uses. When consumers of water in an apartment building pay a rate based upon use by the entire building (average price) rather than an individual rate (marginal price) there is no strong incentive to conserve use.

Even if water is priced according to “willingness to pay”, there may still be market failure. If the ecological cost of water withdrawals is not incorporated into the market price, a greater than optimal level of water withdrawal will occur. Two approaches to incorporating the ecological opportunity cost of water withdrawals include a government tax to discourage use and allowing non-governmental organizations to enter water markets, buy water rights and then leave the water in the stream.

Water resources in western states are better described as exhaustible resources particularly in those states overlying the Ogalla Aquifer and other slowly recharging aquifers. The economic analysis of water as an exhaustible resource is very similar to the analysis of water as a resource flow, only there is an additional opportunity cost. The first opportunity cost is the cost of not having water for another current use. This is called contemporaneous opportunity cost. The second is the opportunity cost of not having the water available for future use, which results from current use depleting the stock available. This is called intertemporal opportunity cost. An efficient allocation of water would require that price reflect both contemporaneous and intertemporal opportunity cost.

In the United States there are two types of property rights: appropriation rights and riparian rights, and these are defined on a state-by-state basis. Appropriation based water rights make water available for use by anyone who can apply it to a beneficial purpose. Priority goes to the user who establishes his or her appropriation-based rights first. A current user cannot sell his or her rights to a more valuable user because this would constitute a new use. Riparian water rights are based on ownership of the land underlying or adjacent to the body of water and are not based on prior use. Riparian users of water do not "own water" but have access to water. All riparian users have equal access. Since riparian rights are based on ownership of lands bordering the water, rights may not be transferred to users outside of the watershed. There may be an additional cost associated if the use of water renders it unfit for other applications.

There are three types of uses that degrade water quality. The first is when removal of water from surface water bodies or groundwater aquifers generates ecological damage. Heavy water withdrawal in the coastal area of southern Florida has lead to saltwater intrusion into the aquifer. The second is when a direct consumer of water uses it and returns it to hydrological cycle with wastes and contaminants. An example would be residential use of water which adds human wastes: even when treated, the water has a higher level of nutrients which can cause ecological damage. The third type of use is represented by activities that generate wastes that are directly deposited into or make their way through natural mechanism such as run-off from rainfall. An example would be rainfall run-off that carries pesticides from agricultural fields. Table 15.1 summarizes the sources and impacts of pollutants that adversely affect water quality.

U.S. policy toward water pollution has historically focused on large point sources of pollution. Point sources of pollution are those where the pollution enters the water body at a specific point, such as the end of an effluent discharge pipe. One of the major thrusts of attempts to reduce water pollution was programs to reduce the impact of the discharge of municipal sewage. As late as the 1960s, many small cities did not have a water treatment plant and dumped raw sewage directly into rivers and lakes. This time period also saw inadequate treatment in the larger cities. As a result, there was severe degradation of virtually every river that flowed through a metropolitan area. Lake Erie, which was particularly hard hit, became incapable of supporting aquatic life.

Amendments to the Clean Water Act required all municipalities to develop and upgrade their sewage treatment facilities. This included both primary (removal of suspended particles) and secondary treatment (breakdown of organic wastes). Programs were designed so that the federal government would pay 75 percent of the costs of the facility, and the local government would be responsible for the remainder of the construction costs and for operating costs. The primary reason for the federal government involvement was the that the social benefits of waste water treatment were greater than the private benefits of treatment. Since the federal government subsidized construction but not operation of these facilities, local governments tended to favor a capital intensive design which leads to a nonoptimal mix of inputs in production. Construction of these plants was completed in the 1970s. One result was the recovery of many of the polluted river systems, including Lake Erie.

The subsidized improvements in municipal sewage treatment plants were required by the Water Pollution Control Act of 1972, the Clean Water Act of 1977, and 1977 and 1987 amendments to the Clean Water Act (CWA). These acts, based on command and control techniques, also focused on other large point sources of pollution, such as paper plants, food processing facilities, and other industries.

The National Pollution Discharge Elimination System (NPDES) made all discharges illegal unless authorized by NPDES. Polluters were required to use best practical technology (BPT) for conventional pollutants and best available technology (BAT) for toxic pollutants. BPT allows for the consideration of the cost of the technology while BAT does not. Unfortunately, the command and control approach to policy forced all firms to use the same type of control mechanism, regardless of the effect of their emissions on the environment.

The overall goal of the Clean Water Act and associated amendments was to restore and maintain the chemical, physical, and biological integrity of the nation's water. Operation goals included the elimination of all discharges (EOD) by 1985 and fishable-swimmable waters by 1983. The Law of Mass Balance would make the goal of eliminating all waste impossible.

Economic incentives have not been employed to deal with water quality problems. While it would be feasible to develop a system of marketable pollution permits, it would require more interstate cooperation, since all the major river systems span several states. The alternative source of pollution, non-point source pollution, is associated with agricultural, urban, and suburban run-off. Recently new regulations have been developed requiring farmers to institute "best farming practices" to control nutrient run-off and soil erosion.

Even though some progress has been made in controlling organic pollutants, the problem of toxic pollutants has not been similarly reduced. Many areas with healthy fishing populations also have prohibitions against consumption of the fish due to the high levels of contamination by toxins such as PCBs, mirex, dioxin, and heavy metals.

The water problems in other countries (particularly developing countries) may be more severe than in the United States. The primary water problem in developing countries is the contamination of water by untreated human waste. This is true not just in villages, but also in very large urban areas such as Rio de Janeiro, where large slums intensify the waste problem. This is not just a third world problem. In the Po River Valley in northern Italy, many cities (including Milan) dump untreated wastes into the river. The Mediterranean Sea suffers from extreme water pollution problems which are expected to increase as North Africa becomes more industrialized.

One of the major problems associated with water extraction and water pollution in Europe, Asia, Africa, and Latin America is transfrontier externalities. The water consumption and waste disposal activities of one country affects water availability and water quality in neighboring countries. This is particularly true in the Middle East, where geographically small countries overlie common aquifers and where rivers such as the Jordan River and the Tigris-Euphrates River drain several countries. These transfrontier externalities cannot be internalized without international agreement.

The United States has longstanding agreements with Canada concerning water use and water quality in boundary areas, and a special commission to deal with Great Lakes issues. Agreements with Mexico are being developed.

Problems with deforestation, over-tillage, tillage of hillsides, heavy use of dangerous pesticides, and run-off of fertilizer has seriously affected water quality in many developing nations. One of the most degrading uses of water is the irrigation of agricultural fields. Irrigation may lead to the rapid depletion of groundwater and reduced flows in rivers. Repeated soaking of the soil and the evaporation of the water in the soils draws salts from lower levels of the soil and deposits them in the top layers of the soil, where they adversely affect many of the crops. Large withdrawals from a river can result in destruction of the aquatic systems. An example is the Aral Sea in the former Soviet Union, where the flow of the river draining into the sea was reduced so much that the fisheries within the sea were destroyed. Tables 15.2 and 15.3 examine the extent of damage caused by irrigation.

KEY CONCEPTS AND DEFINITIONS

Hydrological Cycle – refers to the movement of water from the atmosphere to the ground and then its evaporation and return to the atmosphere.

Nutrient Cycle – refers to how the basic nutrients (nitrogen, potassium, and phosphorous) move through the ecosystem.

Anoxic Decay – the decay process where bacteria operate in absence of oxygen. This leads to the "rotten eggs" smell associated with polluted waters.

Fossil Water – water that has accumulated slowly in underground aquifers over millions of years. Although these aquifers may contain very large amounts of water, they are being recharged at a very slow pace.

Contemporaneous Opportunity Cost – alterative uses for resources within the current time period. Highest alter- native given up in current time period determines the contemporaneous opportunity cost.

Intertemporal Opportunity Cost – the opportunity cost of not having the resource available for future use.

Appropriation-Based Water Rights – makes water available for use by anyone who can apply it to beneficial purposes. Priority goes to the use who established his or her appropriation-based rights first.

Riparian Rights – rights to water are based on the ownership of the land underlying or adjacent to the body of water and are not based on prior use. Riparian users of water do not own the water, but have the rights to use it.

Point Sources of Pollution – those sources where the pollution enters the water body at a specific point, such as at the end of an effluent discharge pipe.

Water Pollution Control Act of 1972, Clean Water Act of 1977, and 1977 and 1987 Amendments – these acts focused on other large point sources of pollution, such as paper plants, food processing, and other industries. All discharges were illegal unless authorized by the National Pollution Discharge Elimination System.

Transfrontier Externalities – when consumption or waste disposal activities in one country affect water availability and water quality in neighboring countries. These cannot be internalized without international agreement.

Chapter 15 Short-answer questions

1. What are the four distinct problems that have arisen that affect the availability of water in the United States?

· In many areas of the country, use exceeds rate of replenishment.

· Many activities use water as an input and when it is returned, the quality is diminished.

· Many activities use surface or groundwater for waste disposal.

· Degradation of ecosystems weaken their ability to store water and modulate the drought/flood cycle.

2. What is the hydrological cycle and why is it important to understand the different impacts of human activity on this cycle?

· Hydrological cycle refers to movement of water from atmosphere to ground and then its evaporation and return to the atmosphere.

· Human activity can impact quality of rain and quantity of water returned to groundwater and aquifers.

· Forests and other terrestrial systems play an important role by slowing the descent of rain water and allowing more moisture to be absorbed into the ground.

3. What kind of impact does water pollution have upon the nutrient cycle? What are the different sources of water pollution which significantly impact the nutrient cycle?

· Organic wastes from human activity can cause problems.

· Dissolved oxygen is removed from water as nutrients are broken down.

· Excess organic waters results in a greater decline in dissolved oxygen.

· Potential for algae blooms increase with increased organic material and exacerbate decreased in dissolved oxygen.

· No oxygen, no life.

· Causes include agricultural run-off, suburban run-off, paper plants, food processing, stockyards, and sewage discharge.

4. Water, in its various forms, has been described as a renewable resource, a nondepleting stock with renew- able flows, and an exhaustible resource. Expand on these descriptions and give examples of each.

· Renewable resource-water in general meets this definition through the hydrological cycle;

· Resource flow-riverine systems meet this definition. Quantity within the system is independent of quantity removed;

· Exhaustible resource-"fossil water," water which has accumulated for millions of years in underground aquifers.

5. Figure 15.1 illustrates the daily volume of water that can be withdrawn from a river as a fixed quantity. What happens as the demand for water rises, and what has been the traditional response to this type of change in the demand for water?

· Rising demand will result in rising price at fixed output level. This will be a reflection of the opportunity cost of consuming fixed flow.

· Property rights must be well defined.

6. Discuss the different market failures that result when the price of water is not linked to the quantity of water which is used.

· Providing water through a regulated monopoly may mean price does not reflect opportunity cost. Price could be too low. When scarcity occurs, the choice of which uses to allow may be chosen through prohibition of new uses, regardless of efficiency.

· Political pressure may keep price low.

· Apartment buildings without individual meters create a situation where the actions of individual tenants are not linked to cost of water.

· Choice of uses to limit use often determined through means other than price.

7. Your text argues that the inability to transfer water rights results in water not being allocated for its most beneficial use. Explain.

· Inability to transfer property rights means an inability to move resource to "better use." Less efficient allocation and no ability to change use patterns over time.

8. Discuss the various aspects of the conflict that have developed over the use of water in southern California.

· Farmers have appropriation rights; they currently pay a fraction of the opportunity cost associated with water use.

· Cheap water results in water intensive production choices.

· Cities go dry.

9. Why has U.S. policy towards water pollution historically focused on large point sources of pollution? What types of policies have been developed?

· U .S. policy has traditionally focused on large sources because these were easy to identify. Initially these were sewage treatment facilities.

· The Clean Water Act of 1977 and related amendments required cleanup of these facilities.

10. What would be required to develop a functioning system of marketable pollution permits to control water pollution in the United States?

· The system would require more interstate cooperation, since all major river systems span several states.

· Easy to measure dispersion because pollutants move with current.