The Welfare Impact of Self-supplied Water Pricing in Canada: A Computable General Equilibrium Assessment

This paper uses a computable general equilibrium model to assess the welfare cost of changing the method of water allocation in Canada towards one that uses prices to ration demand. We model the introduction of a price on both water that is abstracted as well as water that is consumed (that is abstracted, and not returned to the source). We estimate that reducing water consumption by 25 % would require imposition of a price on water consumption of around <InlineEquation ID="IEq1"> <EquationSource Format="TEX">$$\$0.21/\text{ m }^{3}$$</EquationSource> </InlineEquation>. Similarly, introduction of a water abstraction charge of about <InlineEquation ID="IEq2"> <EquationSource Format="TEX">$$\$0.013/\text{ m }^{3}$$</EquationSource> </InlineEquation> would be sufficient to reduce water abstraction by 25 %. We find that if revenues from water pricing are returned in lump sum to households, the introduction of water pricing would result in a modest welfare loss. When revenues from water pricing are used to offset existing taxes, we find a gain in welfare corresponding to a ‘strong double dividend.’ Copyright Springer Science+Business Media Dordrecht 2013