CALIFORNIA WATER PRICING Case Solution
Current Situation & Problems
As energy is considered as one of the scarcest resource in the east, the availability of water is considered to be the scarcest resource in the west. However, within the west the appropriate allocation of water is more important as compared to any other state in the west. One of the main reasons for this is that the population of California is burgeoning and also the agricultural sector of California is gigantic. About 85% of the total water in California is thus, used for irrigation purposes.
This case emphasizes on the most optimal allocation of water with brief background of the patterns which had been established in the past for the consumption of water. These approaches began with the creation of the riparian rights but this system started to unravel in the 1800 s and the confusion among the prior appropriate doctrine and riparian rights had established private property in water. Ultimately, the system of water allocation was changed to a state control system to water. However, the system of water which had been established within this legal framework had proved to be institutionally and physically complex.
Based upon the irrigation projects in the country, only 60% of the water thirst was fulfilled through these projects and the remaining was fulfilled from under the ground. Due to this shortage of water, the water supplied for the irrigation purposes to the farmers and to the residential users was priced at significantly different rates. For instance, farmers paid less price as compared to the residential users. As a result of these pricing structures resulted in significant anomalies and about $ 5 billion loss to the society as a result of the prices charged to the farmers.
However, in the recent years now there has been a growing interest to alternative water pricing systems such as the marginal cost pricing system. This case focuses on the relative impact of a marginal cost pricing system in the water consumption, costs of production, demand and supply of water and differentials of water prices for different crops across different regions. The reformers had to estimate and predict which crops and which regions would be most impacted by the new water pricing system in California. .....................
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