A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Burdack, Doreen Working Paper The economic impact of water restrictions on water- dependent business in South East Queensland, Australia Finanzwissenschaftliche Diskussionsbeiträge, No. 65 Provided in Cooperation with: Chair of Public Finance, University of Potsdam Suggested Citation: Burdack, Doreen (2011) : The economic impact of water restrictions on water-dependent business in South East Queensland, Australia, Finanzwissenschaftliche Diskussionsbeiträge, No. 65, Universität Potsdam, Lehrstuhl Finanzwissenschaft, Potsdam This Version is available at: http://hdl.handle.net/10419/59040 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Universität Potsdam Finanzwissenschaftliche Diskussionsbeiträge The Economic Impact of Water Restrictions on Water-Dependent Business in South East Queensland, Australia Doreen Burdack Diskussionsbeitrag 65 Potsdam 2011 Doreen Burdack E-Mail: [email protected] Publisher: Prof. Dr. Hans-Georg Petersen University of Potsdam Faculty of Economics and Social Sciences Chair of Public Finance August-Bebel-Str. 89 D - 14482 Potsdam Homepage: http://lsfiwi.wiso.uni-potsdam.de/start/index.html Doreen Burdack The Economic Impact of Water Restrictions on Water-Dependent Business in South East Queensland, Australia Final Thesis University of Potsdam, Germany In Cooperation with the Sustainability Research Centre University of the Sunshine Coast, Australia September 2011 Mit den Finanzwissenschaftlichen Diskussionsbeiträgen werden Manuskripte von den Verfassern möglichen Interessenten in einer vorläufigen Fassung zugänglich gemacht. Für Inhalt und Verteilung sind die Autoren verantwortlich. Es wird gebeten, sich mit Anregungen und Kritik direkt an sie zu wenden und etwaige Zitate aus ihrer Arbeit vorher mit ihnen abzustimmen. Alle Rechte liegen bei den Verfassern. ISSN 0948 - 7549 I TABLE OF CONTENTS page Table of contents.................................................................................................. I List of abbreviations .............................................................................................II List of illustrations ................................................................................................III List of tables ........................................................................................................III Introduction ..........................................................................................................1 1 Water market ................................................................................................3 1.1 Demand and supply ..............................................................................5 1.2 Efficiency of water-allocation.................................................................9 1.3 Market failures and sources of inefficiency ..........................................11 1.3.1 Externalities ....................................................................................12 1.3.2 Water pricing ...................................................................................13 1.3.3 Transaction costs ............................................................................15 1.3.4 Property rights ................................................................................15 1.3.5 Natural Monopoly ............................................................................17 1.4 Reaction to market failures .................................................................19 1.4.1 Liberal perspective ..........................................................................19 1.4.2 Governmental arrangements...........................................................21 1.5 Water restrictions and welfare effects .................................................24 2 The Situation in South East Queensland ....................................................28 2.1 Water allocation in SEQ ......................................................................28 2.1.1 Suppliers .........................................................................................30 2.1.2 Demand ..........................................................................................34 2.1.3 Subsidies and contributions ............................................................37 2.2 Institutional arrangements ...................................................................38 2.2.1 Restrictions in SEQ .........................................................................40 2.2.1.1 Level of restriction since 2005 .................................................40 2.2.1.2 Level of restriction today .........................................................44 2.2.2 Water Efficiency Management Plans...............................................46 2.3 Effects of restrictions in SEQ ..............................................................48 2.3.1 Welfare effects ................................................................................49 2.3.2 Effects on residents ........................................................................52 2.3.3 Effects on business .........................................................................54 2.3.4 Occurrence of public costs ..............................................................57 2.4 Planned restrictions ............................................................................58 3 Evaluation of restrictions.............................................................................60 3.1 Advantages of restrictions ...................................................................60 3.2 Disadvantages of restrictions ..............................................................61 Conclusion .........................................................................................................63 List of appendices ..............................................................................................66 Appendices ........................................................................................................67 References .........................................................................................................75 II LIST OF ABBREVIATIONS A Annus (Latin; meaning: year) AC Average costs AU$ Australian Dollar BWEP Business Water Efficiency Program C Factors like climate circumstances or technology COAG Council of Australian Governments Ɛ Elasticity E.g. Exempli gratia (Latin; meaning: for example) Et al. Et alli (Latin; meaning: and others) GNP Gross national product GRP Gross regional product GVA Gross value added LGA Local government authorities MC Marginal costs MJA Marsden Jacob Associates ML Megalitre MNB Marginal net benefit OECD Organisation for Economic Co-operation and Development Pw Price of water Pi Prices of other factors of production like capital and labour Pa Output prices Qw Quantity of water QWC Queensland Water Commission S Supply function SEQ South East Queensland W Water WEMP Water-Efficiency Management Plan WTP Willingness to pay X Quantity of products III LIST OF ILLUSTRATIONS Figure 1 Marginal costs of water supply Figure 2 Positive and negative Externalities Figure 3 Natural monopoly Figure 4 Effects of water restrictions Figure 5 Diversity of supply at 2012 Figure 6 Customer classes of urban water use in SEQ in 2005 LIST OF TABLES Table 1 Price Path for Bulk Water Prices (2008 – 2018) Table 2 Restriction levels, triggers, targets, and key elements Table 3 Willingness to pay to avoid water restrictions in SEQ Introduction 1 INTRODUCTION Water is a vital necessity for each creature on this planet. Its subsistence allows life and represents our environment. On earth, water reserves are limited and fac- tors such as economic growth, innovations in transportation of water, growth in population, and climate change influence the original condition of our water resources. Demand for water is increasing and natural water supply from existing sources is limited. Therefore, water as gets scarcer and societies have to deal with drought periods and imminent water shortfalls. To understand why decision makers decide on policies like water restrictions, it is necessary to illuminate the market of water. This final thesis begins with a theo- retical part, which shows the mismatch between demand and supply on the water market, and illustrates why the water market is out of balance in Chapter 1. As a result of the failure of the