My company has been asked to help a local water utility with a risk assessment in case of an earthquake. We are proposing an economic approach -- attempting to quantify actual risks, as opposed to the more common "high, medium, low" or risk tolerance thresholds.I replied:
A major difficulty seems to be estimating the consumer surplus from water supply, particularly after a disaster. I've looked at estimates of [price] elasticity, but even if you believe them, they don't tell you much about the economic cost of a total loss of supply.
I wonder if you have any suggestions about where to look.
The surplus from access to drinkable water would be HUGE, varying from the price of bottled water (saved by having piped water) to the value of not getting an intestinal disease/losing your unborn child etc.To which DJ replied:
Note that water consumption after a disaster occurs at the top of the demand curve, where values (thus surplus) are highest and elasticity is probably VERY low. Elasticities are not usually calculated with respect to such consumption decisions. In the case of indoor water use (drinking plus much more) they are as low as -0.10. In most places where drinking water is used extravagantly (e.g., watering lawns), elasticity is high (-0.8-1.2), meaning that surplus is low.
For the time being our approach is to estimate a demand curve using current price and estimated elasticity of demand. We extrapolate using a constant slope to a maximum value [for the first unit, thus the "anchor point" for tapwater demand (i.e., $500/m3 @ $0.50/liter), which does NOT represent the value of drinking water as much as the point at which demand for tap water shifts to the demand for tap water...], based on the price of bottled water or something like that.Although I see the merit in this approach, it's important to think about it in terms of comparing cost to price to value.
Bottom line: The value of water depends on how much you already have.