Marginal Productivity Analysis of Global Inter-sectoral Water Demand

There is growing evidence that freshwater availability is declining, while competition among sectors for the withdrawal of this scarce resource is rapidly increasing,(Rosegrant et a, 2002). Therefore, the need to promote inter-sectoral water use efficiency from the demand-side management has necessitated a study to investigate the responsiveness of different productive sectors and sub-sectors to water prices. Extracting data from the GTAP and UNIDO databases and adopting the marginal productive approach by Wang and Lall (2002),and using the two-stage-least squares method, the translog production function is estimated, from which the output and price elasticities and the marginal value of water is computed for thirteen sectors. The results indicate that generally, water use by all the production sectors is fairly price elastic, implying that water price could be used to improve water use efficiency. However, there are varying degrees of price elasticities of sectoral water demand for the different sectors. The results also suggest that, to improve industrial water use efficiency, water prices should at least reflect the marginal value of water in the different sectors. This policy should be used in complimented with other mandatory policies like fixed quantity of freshwater intake by industries, water treatment and recycling, effluent charges etc.