Essays on Water Resource Economics

Abstract

A canonical example in economics of the difference between marginal and total value is the diamond-water paradox. The high price of diamonds is derived from their rarity; whereas the price of water is low due to its abundance, even though it is essential to sustain human life. Scarcity, rather than abundance, better characterizes water availability for many people and this dissertation studies how applied economic principles can be utilized to manage water resources. The first chapter estimate the costs of water volatility in the agricultural sector through a hedonic analysis of heterogeneous water rights. Security for water rights is capitalized into the value of agricultural land, which informs the magnitude and distributional welfare effects of droughts. Tests for an endogenous changepoint fails find a time-varying price premium, indicating that the costs of increased water volatility due to climate change are not manifested in agricultural property markets. The second and third chapters focus on economic and behavioral incentives in urban municipal water demand. Chapter 2 presents a disaggregated model of water demand to separately estimate intensive and extensive margin demand elasticity. Identification is achieved through a novel method merging remotely sensed satellite data on vegetative cover with water metering records. The time series of vegetative cover captures changes in landscape over time and identifies the extensive margin elasticity - a parameter that has only been estimated implicitly through the difference in short run and long run demand. Households that maintain green lawns are less responsive to prices than households either change landscapes or have a mixed landscape. Higher water rates increase the probability of converting to low water-intensive landscapes, which in turn is a major driver of long-run demand. The extensive margin with respect to changing landscapes comprises 7\%-48\% of total elasticity for households with significant outdoor water use. The final chapter examines the impact of non-pecuniary incentives stemming from the behavioral economics literature on water demand. In a randomized field experiment social comparisons are found to significantly decrease water demand with substantial heterogeneity both across and within utilities. The utility with the highest average treatment effect saved three times as much water in percentage terms as the utility with the lowest average treatment effect. Higher users are more responsive to the program and there are important interactions between social norms and existing utility conservation programs. Water resources face stress due to population growth, rising incomes, and climate change and these stressors will only increase in the future. This dissertation addresses several key issues in agricultural and residential that aim to increase knowledge and aid public policy of managing water resources in times of scarcity.