Water Allocation Between the Agricultural and the Municipal Sectors Under Scarcity: A Financial Approach Analysis

Abstract

A model examining the National Water Wealth (NWW) and its allocation between the municipal sector and the agricultural sector, where water value is defined as the present value of Water Rights, is presented. Five factors are considered: (i) uncertainty of water supply; (ii) population growth rate; (iii) the effect of time on NWW without new water production; (iv) agency costs, and; (v) production of new waters. The work is based on the model by Jensen and Meckling (J Finance Econ. 3:305-360, 1976), dealing with the effects of agency costs on the value of public companies. Agency costs are subject to conflicting interests between managers, shareholders and bondholders. In the water economy agency, costs stem from a divergence of interests between the government, the agricultural and the municipal sectors. Uncertainty of supply reduces water wealth of both sectors, with a stronger adverse impact on water wealth of the agricultural sector. Our model shows how production of new waters can Water Resour Manage (2015) 29:3481-3501 have contributive effects on national water wealth. The modeling demonstrates the option of reducing the overall uncertainty of water supply and production of new waters which leads to favorable effects on the national water wealth. AbbreviationsCpd t Agency costs of debt Cpg t Agency costs of owner's equity Cpt t Total agency costs Egwr t Expected groundwater recharge quantity F The extent of the Water Commissioner's lack of identification with the agricultural sector Fx Maximal F for each period Jr Constant ratio between the average discount rate for the two sectors (Rv t ) and the discount rate of the municipal sector (Rm t ) Lun t Relative uncertainty of supply imposed on the agricultural Nwh t It is Nww t including the present value of desalination Nww t National Water Wealth Nww t (Cpt t ) NWW assuming agency costs Pg Fixed positive rate of population growth Qh t Present value of desalination Qhy t Annual constant average quantities of water generated from desalination Qm t Water allocation for the municipal sector Rag t (Cpg t ) Discount rate of the agricultural sector assuming agency costs of owner's equity Ra t Discount rate of the agricultural sector Rf t Risk-free discount rate Rh t Discount rate of desalination Rm t Discount rate of the municipal sector Rm t (Cpd t ) Discount rate of the municipal sector assuming agency costs of debt Rv tWeighted average discount rate of the two sectors Rv t (Cpt t )Weighted average discount rate of the two sectors assuming agency costs Va constant quantity of water per period allocated to the agricultural sector from the period t+1 onwards Va(Cpg t ) Fixed average amount of water allocation per period (assuming agency costs of owner's equity) for the agricultural sector from period t+1 onwards Vg t Water quantity that the Water Commissioner sees as "his own" Vo t Water quantity that the Water Commissioner does not see as "his own" Vo t (Cpg t )Water wealth of the agricultural sector assuming agency costs of owner's equity Wsa t Agricultural sec...

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