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• 5.0 Economic Value of Water

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• 5.1 Domestic
• 5.2 Field
• 5.3 Stock
• 5.4 Industry Water

5.1 Domestic

The economic value of water for domestic use (the dom1 class, Section 3.1) is assumed as $1/m³. This is the estimated value of water in Christchurch City (Section 4.1.1). Christchurch City is the only example where we have willingness-to-pay information on the value of domestic water. The value of water in Christchurch is estimated as approximately seven times the cost of water. It is likely that water values in other regions is significantly greater than the cost. Water values in Auckland, for example, are probably greater than the $1.18 cost (Table 19). However, we assume $1/m³ as a value as there are no other estimates available.

The problem with using administered prices as a measure of value is illustrated in Figure 4. Administered prices are those set in a non-competitive environment with or without any reference to the cost of supply and the sustainability of the resource. For example, if households use Q units of water they will pay $P_AQ_A to the supplier. The traditional economic model of demand would consider

Q_W = f(P_W,P_O,I,S)

Where P_W = the price of water, P_O = price of other goods, I = income, and S = other variables such as number of people in household, region, etc. We can observe (Q_A,P_A) but there is not enough variation in P and Q to estimate demand, let alone include S and I variables that can be obtained from census data.

Turning now to value, economists use consumer surplus to measure value - the triangular area below the demand curve above the price line. Obviously we can't measure this without a function. Can we say anything about value at the margin? That is, what would the community pay for a change in water quantity, say Q_A±∆Q? In the absence of a functional relationship between price and quantity, we can at best, say the $P_A is indicative of a lower (upper) bound measure for a decrease (increase) in the quantity of water. The administered price $P_A is, at best, a measure of average willingness to pay. In cities where water is not priced volumetrically the measurement problem is more difficult because we can only observe quantity, assuming that it is metered! In these cases we have to resort to other approaches viz. cost of supply.

As a more general note, the above discussion applies to all uses of water where economic value is concerned. Water is a key input to agriculture and industry. To our knowledge, with the exception of White et al. 2001 there has been little research done on the economic value of water in alternative uses (i.e. the full range of possible water uses).

5.2 Field

It is assumed that the value of this water is $0.2/m³ - the same as for stock water (Section 4.2). This value is assumed as no New Zealand studies of the value of water for this use are known to the writers.

5.3 Stock

The use of stock water by stock is assumed as 7% (Table 17) and the value of this water is assumed as $0.2/m³ (Section 4.2).

5.4 Industry Water

The industrial classes of Ford et al. (2001) are translated into the classes ind1 to ind8 as defined in Table 1 (Table 21). For example, freezing works are included in the ind1 class. The economic value assigned to each water use class is the average of total value added figures in each category (Table 20). A considerable range in estimates of total value estimates in each "ind" class is observed. For example, the economic values grouped in the ind8 class range between $0.004 million/20000m³/yr to $0.107 million/20000m³/yr, or $4m³/yr to $107m³/yr. This results in considerable uncertainty in the calculations of economic value. Uncertainties are not quantified in this report.

A value of $0.07million/20000m³/yr is assumed for water use in the mun1 class (Section 3.1). This value is the mean of the "ind" value estimates in Table 21. A number of consents have no specified "ind" category. A value of $0.07million/20000m³/yr is assumed for these consents. A value of $0.07million/20000m³/yr is also assumed for the "ind7" class as no information exists on this class of use in Table 21.

The valuation method used by Ford et al. (2001) is different from the willingness-to-pay method used to estimate the value of domestic water (Section 5.1.1). Therefore, the authors of this report believe that values derived by the two methods are not compatible. Therefore we do not compare the economic values of industrial use with economic values of other use classes.