Scarcity Rents for Water: A Valuation and Pricing Model.

Section II briefly describes pricing practices commonly used by urban water utilities and defines the efficient water price in terms of long-run marginal extraction costs per unit plus a rent element reflecting the value of water in situ, i.e., in its original aquifer or surface source. Section III then develops a model, following Hanson (1980), to measure this rent. Section IV presents estimates for the case of the Honolulu Board of Water Supply. The Board, which serves a population of about 800,000 on the island of Oahu, anticipates the need for desalting brackish groundwater within 20 years. While still a rough approximation, our estimates of scarcity value suggest that at present raw water should be valued on the order of twice the current unit quantity charge. Thus, adding the value of raw water to existing costs suggests that the current charge should be roughly tripled. Section V examines alternative extraction cost functions to generalize the possible implications of this model, while section VI offers some final comments. [ABSTRACT FROM AUTHOR]