California Water Pricing Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Question 1

CURRENT SITUATIONS AND PROBLEMS

In the western state, water is the major limiting or scarce natural resource. The efficiently appropriation of this limiting resource such that water, is the crucial in the California, comparing to other, as to meet the demand of water consumption properly to some extent.

In the California, there is a water law which is followed by the people over there irrespective of whether they are farmers or urban. People in California, whether they are urbans or farmers, purchase the water from retailers. The wholesalers supply the water to retailers and the state supplies the water to the wholesalers. Currently, the agricultural users such that farmers buy the water at the price lower than the marginal cost and the urbans buy the water at the price above than the marginal cost.

With regards to the pricing at the retail level, there is no fix pricing, however a recent research done by a large Los Angles petrochemical firm has found out the average prices such that the average price for agricultural users is $10 per acre-foot and the average price for the urbans or residential is $100 per acre-foot. There is no pricing balance over there, even in the past the society made a huge loss by charging the farmers less than the marginal cost of the water.

Question 2

IMPACT OF MARGINAL COST PRICING SYSTEM ON TOTAL AGRICULTURAL CONSUMPTION AND TOTAL URBAN CONSUMPTION OF WATER

The marginal cost pricing system is a system in which price will equal to the actual cost of that particular item, here it is water. So in this way it will possible to fix the price at a level for the residential and the agricultural users. However, fixing the price through the marginal cost pricing system will somehow impact the consumption of both residential and the farmers in California.

Currently, farmers are buying water at a lower price than residential users. If the strategy of marginal cost pricing system will be implemented then the consumption of water might not reduce and there might be no impact on agricultural use of water because farmers grow the crops according to the demand.

Urban or residential users of water can take advantage in this marginal pricing strategy as right now, they are paying more than the marginal cost for the water use, and then after they will be able to pay less and can get advantage. So the demand or consumption of the urban users of water can rise because of the lower prices compare to the previous prices. However, the prices of the some particular crops can increase because of the increase in the prices of water, so this can again impact the some of the urban or residential users as it will cost more to the users to buy those particular crops which were cheap before the implementation of the proposed strategy.

Question 3

IMPACT OF MARGINAL COST PRICING SYSTEM ON THE MARKET FOR AGRICULTURAL CROPS

Currently, there are 13 major water basins in California and their current average prices are ranging from $10 to $40 per acre-foot whereas their marginal costs are ranging from $20 to $100 per acre-foot therefore the difference will be ranging from $10 to $80 per acre-foot. There will be a huge change in the prices if such marginal cost prices system will be implemented. Analyzing these prices differences above some regions will be more affected because in some of the regions, there are crops which demand or consume more water than other crops so if the price will increase for the factor, then the overall cost will increase hence the price of that crop will increase substantially. Furthermore, some of the farmers incurred more cost of production then others, mainly because some lands are more fertile than others.California Water Pricing Case Solution

Additionally, the crops can be effected through the pricing strategy according to their place such that domestic and international markets. Some particular crops gives large exports to the international markets, if the cost of the crops will rise then it can impact the overall prices in the international markets and the level of exports as well. It is also important to look at the bigger picture.

According to the above discussion if the price will change then the market equilibrium (Supply and demand) will also change (See figure 1). ............................

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