Date of Award

8-2010

Document Type

Thesis

Degree Name

Master of Arts (MA)

Legacy Department

Economics

Advisor

Maloney, Michael

Committee Member

McCormick , Robert

Committee Member

Tollison , Robert

Committee Member

Sauer , Raymond

Abstract

In times of drought, mandatory water restrictions are a popular option for local governments to prevent water shortages. The state of South Carolina has had mandatory water restrictions in various counties for nearly a third of the past decade. If there are heterogeneous consumers with varying marginal valuations for water, these mandatory restrictions may be economically inefficient. I calculate what welfare gains could be achieved for the state by allowing prices to fluctuate instead of imposing mandatory restrictions.
To perform this calculation, I assume a basic quadratic demand function for water with constant income elasticity. The water restrictions force all consumers down the demand curves to a lower quantity than they would otherwise consume. The percentage of this movement along the demand curves is taken from previously calculated reductions in water usage due to restrictions shown in the literature. I estimate the net welfare loss for the state by the mandatory restrictions. I then calculate the estimated welfare gains of allowing trade across counties.
To perform these calculations, I have gathered data on residential water usage in every county within South Carolina for 2005. In addition, I have per capita income and population values for each county. I use the income elasticity of demand for water of .25 based on studies in North Carolina. I use data from Agthe and Billings 1987 paper to estimate a functional relationship between income and price elasticity, which is then applied to each county to estimate the county's price elasticity. Based on pricing data obtained across the state, I use a fixed price for water.
My analysis finds a welfare loss of around 20% of the overall expenditures on water. I calculate the gains from trade to be initially around only 3% of the overall welfare loss. Subsequent evaluations reveal that this value is sensitive to the overall variance among the counties' price elasticities. If demand for water varies enough among counties or trades among individuals are feasible, then welfare recovery appears to be a viable option. However, if the costs to create such a market are high, then such an effort appears inefficient.

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Economics Commons

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