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

1. Summarize the current situation and problems associated with it.

At present it can be seen that the current situation is having some problems with it. There are some concerns raised about the level of prices that were set by the water districts. The proportion of costs that would have to be paid by the agricultural users and the residential users was not balanced.Therefore the prices that were paid by the agricultural users were lower than the prices that has to be paid by the residential users, respectively.

As a result, this gave rise to the introduction of marginal cost pricing system in order to allocate the accurate price to the water that was used by agricultural users and the residential users in the growth of crops. Despite this, the introduction of this new system would also alleviate the problems that were faced previously. There will be several gains after the elimination of the current problems regarding the pricing of water resources which will give rise to the creation of winners as well as the winners.

Hence, in order to deal with these hurdles, there is a need to make an anticipation regarding which crops and which regions in California would have a greater impact upon it. Moreover, this problem came into existence because of the like other energy resources, water was also the limited natural resource. Initially, there were no restrictions regarding the use of water and it was easily available from rivers or streams, but nowadays due to the rise in population the restrictions are put in place in order to deal with the pricing of water for the use of crops.

2. How would implementation of a marginal cost pricing system for water impact total agricultural consumption and total urban consumption of water in California?

The implementation of the new marginal costing system is going to have an impact upon the consumption of water. This would be applicable to both the agricultural users and as well as the urban users. The difference in the marginal costing scheme will take place in different regions of California. The reason behind this is the nearness of the prices of water to the true marginal cost and also due to the low true marginal cost in other regions.

Moreover, the factor share of water, which represents the total costs has been accounted for by water. Due to the implementation of the marginal pricing system the price of water will show an increasing trend and as a result, both the agricultural users and urban users are going to make an efficient use of the water for the growth of their crops.

For example, in the North Coast the current average price of water was $20 per acre-foot and after the implementation of the marginal pricing system the cost became $50 per acre-foot. Due to this variation the prices of water increased by $30 per acre-foot.

3. How would implementation of a marginal cost pricing system impact the markets for agricultural crops? Clearly indicate the effects on the market equilibrium (price and quantity), as well as on the well-being of consumers and producers of these goods.

After the implementation of the marginal pricing system it is going to have an impact upon the price and also the quantity of crops available in the market. By relating this with the concept of supply and demand it can be mentioned that, the prices are going to increase most probably and it is clear as per the exhibits.

Hence, due to the implementation of this pricing system if the prices for water are going to increase then it will going to result in a less quantity of crops being produced. On the other hand, this approach is also going to result in the benefit of urban users because previously they had to bear higher costs regarding the payment of water.

The producers will also benefit from this new costing system due to the elimination of the monopoly from the market. However, it will have a greater impact upon supply and demand of agricultural crops. Due to the low supply of agricultural crops the demand is going to increase and which will ultimately have an impact upon the prices of crops..............................

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