1

Assignment
Water Economics and Policy for Integrated Water Resource Management
Problem #1
A small town accommodates 1000 households, all connected to a water supply network. It is
assumed that all households behave according to one same demand function. It is also
assumed that all fully pay their water bills.
Water is currently supplied at Pc = $10 per 1000m 3(current price). Overall current supply of
domestic water is 1,000,000 m3 per year (assumed to be the demand Qd).
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Question #1: what is the annual consumption per household (averge)?

m3

The annual consumption per household

1,000,000
year
1,000 household

1,000m 3 / household / year

Question #2: what is the annual revenue of the water utility (service provider)
(excluding costs)?
The annual revenue

1,000,000 m

1,000m

year
3

10$

10,000$ / year

A survey reveals that households would be willing to pay upto 200 $ per 1000 m3 in order to
satisfy their basic needs in domestic water (such is the price of large bottles of drinking water
supplied by vendors).
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Question #3: what is the logarithmic demand function (for all households as one sector)?
The logarithmic demand function is Qd b(ln a ln P )

Let

P1=10

Q1 = 1,000

And P2= 200

Q2 = 0
Substitue P and Q in such equation, when Q2 = 0, a = P2 = 200

Q1
1,000

333.81
200
P

ln
2
ln

10
P1

Therefore,

Qd 333.81(ln 200 ln P )
Qd 1,768.63 333.81 ln P

Remark: Units of P is $ / 1,000 m3 and Q is x103 m3

Question #4: similary, what is the exponentail marginal benefit function (or WTP curve)?
The exponentail marginal benefit function is P a exp Q / b
From Question #3, a = 200 and b = 333.8082
Therefore, P 200 exp Q / 333.81
Remark: Units of P is $ / 1,000 m3 and Q is x103 m3

Question #5: what is the total benefit of domestic consumer (households), also called
consumer surplus CS?

To find the consumer surplus as shown in the figure above, let us integrate the area under
the curve between the limits 10 and 200.
200

CS

1,768.63 333.81ln P dp

10

200

200

10

10

1768.63 dp 333.81 ln Pdp

53,423.60$

Given a supply equation: MC 0.015Qs 5

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Question #6: Considering demand and supply equations, calculate the market clearing
price of water (also called equilibrium price Pe)?
Demand equation = Marginal benefit equation
MB 200 exp Q / 333.81

Supply equation = Marginal cost equation

MC 0.015Qs 5

Let MB = MC, the intersection point of these two equations is equilibrium price, Pe
Therefore,
Pe = 17.3 $/1,000 m3
Qe = 817.7 x103 m3

Pe = 17.3
Qe = 817.7

Question #7: Compare Pe with Pc, and comment on the difference. How would a shift
from Pc to Pe alter demand Qd and Cs?
From previous question,
Pc = 10 $/1,000m3
Qc=1,000 x103 m3

Pe= 17.3 $/1,000m3

Qe= 817.7 x103 m3

The Pe is greater than Pc but the supplied water will be less than demand. So that,
water price is increased from Pc to Pe and the supplied water will be less than demand. Such
that, CS will be changed.
200

CS

1,768.63 333.81ln P dp

17.3

200

200

17.3

17.3

1768.63 dp 333.81 ln Pdp

46,852.10$

CS is decreased from 53,423.60 to 46,852.1 $/1,000m3, decrease 6,571.50 $/1,000m3.

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Question #8: Calculate the net benefit of supplier (or producer surplus PS) and CS under
two prices scenarios.
Scenario 1, water price = 10$/1,000m3.
PS
= area above the supply curve, limited by price

CS

1
10 5 333.33 0 833.33$
2

= area below the Demand curve, limited by price

200

1,768.63 333.81ln P dp 53,423.60$

10

Scenario 2, water price = 17.3$/1,000m3 (equilibrium price)

PS
= area above the supply curve, limited by price
1
17.3 5 817.7 0 5,028.86$
2

CS

= area below the Demand curve, limited by price

200

1,768.63 333.81ln P dp 46,852.10$

17.3

Question #9: what is the total economic value (CS + PS) of domestic water as supplied
and used in SmallTown, under current circumstances (P and Qw)
Scenario 1, water price = 10$/1,000m3.
Total economic value = 833.33 + 53,423.60 = 54,256.93 $
Scenario 2, water price = 17.3$/1,000m3 (equilibrium price)
Total economic value = 50,28.86 + 46,852.10 = 51,880.96 $

Question #10: calculate price elasticity of demand around Pc (use current price and an
alternative price of 11 $ per 1,000 m3 to calculate )

Q
From

Q
P

For P = 11 $/100m3, Qd 1,768.63 333.81ln(11) 968.18 10 3 m 3

968.18 1,000

11 10

1,000

0.332

10

Price elasticity of demand is -0.332, means 1% of increasing price make 0.332%

decrease in demand quantity. Nevertheless, if 1% of price is deceased, 0.332 % of demand
quantity will increase.

Problem #2:
SmallTown authorities wish to develop a waste water plant and plan to impose a tax of $2 per
1,000 m3 used, to be added to the current price Pc.
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Question #11: What will be the consequences of such a decision on consumer demand?
On CS?
The new current price is Pc = 10 + 2 = 12 $/1000m3.
Therefore, Qd 1,768.63 333.81 ln(12) 939.14 10 3 m 3
Determine consequence on consumer surplus CS
200

CS

1,768.63 333.81ln P dp

12

200

200

12

12

1768.63 dp 333.81 ln Pdp

51,486.27$

Question #12: consequences on the total revenue from tax?

Total revenue from tax 12 939.14 10 1,000 1,269.68$

Question #13: consequences on PS and CS? On total economic value of the supply
system?
Determine Producer Surplus
PS

1
12 5 939.14 0 3,286.99$
2

Determine Consumer Surplus

200

CS

1,768.63 333.81ln P dp

12

200

200

12

12

1768.63 dp 333.81 ln Pdp

51,486.27$

Total economic value of the supply system

PS + CS = 3,286.99 + 51,486.27 = 54,773.26 $
When tax is added to the price of water, Consumer demand is decreased to 939.14
x1,000m3, CS is decreased 1,937.29 $ while PS is increased from 833.33 $ to 3,286.99 $.
Furthermore, total economic vlaue is also increased 516.36$.

Problem #3:
The small town municipality plans to develop a greenhouse based horticultural projects
producing high value products (orchids) using the same municipal water. Since overall
resources is limited to 1,000,000 m3 and already serves domestic users, choices are to be
made.The horticultural product will use 100,000 m3 per annum, supplied free of charge by
supply utility. Crop budget unfolds as follows
Average farm-gate price of products (orchids) = $1 each
Total yearly production = 8,000 units
Total production costs = $ 2,000
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Question #14: what is the total value of water (as a product input) of the project?
Total value of water 1 8,000 2,000 6,000$ / year

Question #15: The supplier still has to supply 1,000,000 m3 but only 900,000 m3 are paid
for (10$/1,000m3). What is the revenue of the supplier?
Total benefit of supply

10$
900,000m 3

9,000$
1,000
1,000m 3

1,000,000

0.015Qs 5 0.015
5 20$
1,000

Therefore, net revenue of supplier 9,000 20 8,998$

Total cost of supply

Question #16: Calculate the total economic value of the domestic supply system under
these new conditions (CS+PS) and compare with the total economic value of the
horticultural project. Compare scenarios and comment.
Determine Consumer Surplus
CS = area below the Demand curve, limited by price
200

CS 1,768.63 333.81 ln P dp 13.49 10 1,000 900

2

10

200
200

1768.63 dp 333.81 ln Pdp 174.65

10
10

53,248.91$

Determine Producer Surplus

PS = area above the supply curve, limited by price
PS

1
10 5 333.33 0 833.33$
2

Total economic value

CS + PS = 53,248.91 + 833.33 = 54,082.24 $

In conclusion, the total economic value of domestic supply system is greater than
total value economic value of the horticultural project. The total economic value of this
alternative compares with the alternative without horticultural project, the quantity which is
supplied for domestic reduced but the value of this alternative is bigger than total value of the
alternative without horticultural project.