Estimating Efficient Water Prices in the Sao Marcos River Basin: A Residual Imputation Approach

Abstract

The conflicting demands for water used for irrigating crops, generating power, and supplying humans and livestock have placed many river basins around the world under stress. The competition for scarce water resources will be exacerbated by the impact of climate change. This article uses a residual imputation and net rents approach to obtain economic values and water demand curves of irrigators in Brazil’s Sao Marcos River Basin (SMRB). We estimate that current water prices must increase by over 230 times in the dry season to reduce the water consumption in the basin to the level that is required to accommodate its use to generate electricity as required by the water regulator. These estimated water prices are constrained efficient in the sense that they promote the efficient reduction in water consumption from the agricultural sector to satisfy the existing water permit granted for electricity generation.