Production, Cost, and Increased Salinity in Water

Abstract

Water customers suffer hidden private costs if complete price information is not provided when the salinity in water increases. Previous attempts to estimate the damages or hidden costs resulting from increased salinity have ignored the impact on the production of goods made with the more saline water. Assuming rational economic behavior and a fixed production budget, this note provides an economic rationale for including these effects in future damage estimates. Since water is most often used as an input combined with other inputs, derived‐demand analysis should be used in future damage‐estimate studies to account properly for shifts in water use and productivity caused by the unannounced increase in salinity. This note shows clearly that damages are underestimated when lost output from productivity shifts is ignored. The note concludes that an informational campaign by the water utility, if clean up subsidies are ignored, may be the best way to eliminate the hidden cost to water users.