Economics of water resources planning

635 Pages·0151.046 MB·English

by  James and lee

ECONOMICS
OF WATER RESOURCES
PLANNING
ECONOMICS
OF WATER RESOURCES
PLANNING
L. DOUGLAS JAMES
Associate Professor in the Environmental Resources Center
Georgia Institute of Technology
ROBERT R. LEE
Director, Idaho Water Resource Board
McGRAW-HILL BOOK COMPANY
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ECONOMICS OF WATER RESOURCES PLANNING
Copyright @1971 by McGraw-HilI, Inc. All rights reserved.
Printed in the United States ofAmerica. No partofthis
publication may be reproduced, stored in a retrievalsystem,
or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without
the prior written permission ofthe publisher.
LibraryofC;ongress Catalog CardNumber 79-115146
07-032263-5
67890 KPKP 7987
PREFACE
In a world where an expanding population and an even more rapidly
expanding urban-industrial development are intensifying the pressures
for a better planned water resources management program, the engineer
involved in water resources planning recognizes he must maintain a
planning methodology capable of producing a viable resource develop
ment program. At the same time, he wonders how he can do it. How can
he better structure his design to meet current human needs? How can he
make his design flexible enough to accommodate future human needs,
the nature of which he can scarcely anticipate? How can he devise a
management system for adequately sensing changes in human need as
they occur and quickly adjusting management policy and even system
design as is necessary?
The hydrologic cycle is the vast natural water resources system.
Water falls on the earth, travels downward, over, or under the surface of
the ground, reaches the ocean, and returns to the atmosphere through
evaporation induced by solar energy. But nature picks its own times and
places. The water resources planner seeks to modify the natural cycle by
structural measures thatforce the movementofwaterto times and places
better meeting known human needs. He also seeks to modify, by non
structural measures, the activities of man, so as to better conform to
known movement patterns. He considers a flood control channel and
flood plain management. He considers water supply systems to existing
cities and the development of new cities closer to available supplies. The
best management selects the best possible combination of measures.
The concept of the optimum program is changing as men recognize
the wisdom, if not the necessity, of taking additional factors into con
sideration. Pressures from many groups and disciplines have contri
buted to the expanding awareness of relevant considerations. Business
management has long been concerned with decision making to maximize
returns to the firm. Engineering economy provides the procedures for
the cost analysis of alternatives for the purpose of finding the least-cost
approach, irrespective of viewpoint. Studies in microeconomics examine
vi PREFACE
benefits produced as well as costs incurred, and provide rules for maxi
imizing benefits minus costs as a step in optimization to enhance the wel
fare ofthe general public. Theothersocialsciencesprovidefurther insight
into how the welfare of man, as an individual being and as part of a
group, can be improved. The biological sciences extend the analysis to all
life systems. The institutions responsible for actual resource development
draw from all of these sources in formulating their plans, and improvise
to supplement the available procedures where action cannot wait for
research. As the state of the art now stands, the concepts and procedures
required for planning are scattered through the literature of many
disciplines, some in journal publications but many in otherwise un
published research reports and conference proceedings. The purpose of
this book is to consolidate into a single volume the basic economic
concepts required in water resources planning.
In one companion volume, "Water Resources Engineering,"
1
Linsley and Franzini present the basic physical system and survey the
availablestructuralmeasuresforengineeredwaterresourcesdevelopment.
In another volume, "Water Resources Systems Engineering,"2 Hall and
Dracup present the procedures for analysis of how water resources
systems maybedesigned to function togetheras a whole to betterachieve
specific objectives. In this book, we are seeking to examine how relevant
objectives can be specified as well as the reasoning needed to apply rather
abstract concepts of social welfare to specific design choices.
The readershould approach the material contained inthis bookfrom
the viewpoint of developing a philosophy of planning. The detailed
procedural steps as presented are intended to illustrate basic concepts,
rather than to finalize a method to be followed by rote. These concepts
and the written material describing them have been presented by the
authors in teaching courses on water resources planning and have been
applied by the authors in their planning experience.
The material in this book has been used as the basic text for a one
year course sequence dealing with the economic, social, and institutional
issues involved in water resources management. Parts 1, 2, and 6 plus
Chapters 8and9can be adopted to a one-semesterseniororone-semester
first-year graduate course in public works economics (appropriate within
programs in transportation, air pollution, and civil engineering manage
mentas wellas programsin water resources). The remaining portions can
then be covered in a second-semester course for those specifically inter
ested in water resources. Although the material is covered in a manner
1 RayK.LinsleyandJosephB.Franzini, "WaterResourcesEngineering" (NewYork: McGraw
HillBookCompany, 1964).
2 Warren A. Hall and John A. Dracup, "Water Resources Systems Engineering" (New York:
McGraw-Hill BookCompany, 1970).
PREFACE vii
requiring no specific prerequisites, owing to the diversity of background
among students interested in resource development, some background
in one or more of the areas of engineering economy, sophomore micro
economics, hydrology, water resources engineering, and systems analysis
may add depth to the understanding of selected sections.
The authors gratefully acknowledge the contributions made in
directly to the book through discussion with numerous colleagues.
Particular thanks are extended to Professors Ray K. Linsley and Eugene
L. Grant of Stanford University and Dr. Charles W. Howe of Resources
for the Futurefor their review ofand contributionto various parts ofthe
manuscript. Mrs. Betty Bradshaw and Mrs. Alice Taylor spent many
hours typing preliminary drafts, and Miss Pat Miller typed much of the
final manuscript.
L. DOUGLAS JAMES
ROBERT R. LEE

CONTENTS
PREFACE v
1 ENGINEERING ECONOMY
1 PRINCIPLES OF ENGINEERING ECONOMICS 3
1-1 Equivalence ofKind 3
1-2 Equivalence ofTime 4
1-3 Whose Viewpoint? 5
1-4 Sunk Cost 6
1-5 Incremental Cost 7
1-6 Intangible Values 7
1-7 Predictive Uncertainty 8
1-8 Planning Horizons 9
1-9 StructuringAlternatives 11
2 MATHEMATICS OF ECONOMIC ANALYSIS 15
Formulating the Analysis
2-1 Defining the Alternatives 15
2-2 Physical Consequences 16
2-3 Cash Flow Diagram 16
Discounting Factors
2-4 Single-payment Factors 18
2-5 Uniform-annual-series Factors 19
2-6 Uniform-gradient-series Factors 21
2-7 Nonuniform-gradient-series Factors 24
2-8 Other Cash Flow Patterns 26
Discounting Techniques
2-9 Present-worth Method 28
2-10 Rate-of-return Method 30
2-11 Benefit-Cost Ratio Method 32
2-12 Annual-cost Method 33
2-13 Evaluation ofDiscounting Techniques 34
Other Approaches
2-14 Unreliable Techniques 35
2 MICROECONOMICS AND EFFICIENT
RESOURCE ALLOCATION
3 PRICE THEORY AND RESOURCE ALLOCATION 43
Introduction to Microeconomics
3-1 The Market Economy 43
3-2 Pure Competition 46
X CONTENTS
3-3 Market Demand 47
3-4 Price Elasticity 49
3-5 Market Supply 50
3-6 Market Price Determination 51
3-7 Results ofShifts in Demandand Supply 51
3-8 Significance of Market Equilibrium 52
Consumer Demand
3-9 Indifference Curves 54
3-10 Maximization ofSatisfaction 55
3-11 Consumer-demand Curves 56
3-12 Aggregate-demand Curves 57
4 CONDITIONS OF PROJECT OPTIMALITY 61
Production Theory
4-1 Inputand Output 61
4-2 The Production Function 63
4-3 The Objective Function 64
4-4 Cost and Benefit Curves 64
4-5 Optimality Conditions 66
Geometric Derivation ofBasic Rules
4-6 Optimality Condition 1: CombinationofInputs 67
4-7 Optimality Condition 2: Combination ofOutputs 69
4-8 Optimality Condition 3:Level ofOutput 72
Mathematical Derivation ofBasic Rules
4-9 Lagrange Multipliers 74
4-10 Application ofthe Lagrange Multiplier 75
4-11 Three Basic Optimality Conditions 76
4-12 ApplicationofOptimality Conditions 77
Market Allocation under Pure Competition
4-13 Very Short Run Analysis 82
4-14 Short-run Analysis 82
4-15 Long-run Analysis 85
Applications
4-16 Use ofSupply and Demand Curves in Project Evaluation 86
4-17 Market Allocation under Pure Monopoly 88
5 WELFARE ECONOMICS 95
Economic Analysis and Social Objectives
5-1 The Role ofWelfare Economics 95
5-2 The Social Welfare Function 96
5-3 First-order (Social) Efficiency 97
5-4 The Question ofSovereignty 98
5-5 The Question ofGoals 101
5-6 Basic Optimality Criteria 102
5-7 Second-order (Economic) Efficiency 103
Adjustments Required by Imperfect Markets
5-8 Adjustment Procedure 105
5-9 Public Wants 106
CONTENTS xi
5-10 External Effects 107
5-11 Natural Monopoly 110
Adjustments Required by Multiple Goals
5-12 Stabilization oftbe Economy 112
5-13 Income Redistribution 114
5-14 Regional Development 115
5-15 Environmental Quality 116
6 DISCOUNT RATE 119
6-1 Capital Formation 119
6-2 Discount Rate vs. Interest Rate 120
6-3 Opportunity Cost 121
6-4 The Capital Market 121
6-5 Deficiencies in the Capital Market 124
6-6 Basic Approachesfor Dealingwith Market Deficiencies 126
6-7 SpecificApproaches for Picking a Discount Rate 126
6-8 CurrentDiscounting Practice 129
6-9 Consequences ofDiscounting at a Low Rate 130
3 PLANNING IN A REAL WORLD SETTING
7 THE INSTITUTIONAL FRAMEWORK 137
Organizational Considerations in Economic Analysis
7-1 The DivisionofResponsibility 137
7-2 Interagency Coordination 141
7-3 Senate Document97 142
7-4 The Water Resources Planning Actof1965 143
7-5 Steps in Project Development 145
Legal Consideration in Economic Analysis
7-6 TheLegal Hierarchy 148
7-7 Surface-waterLaw 149
7-8 Ground-water Law 151
7-9 Law on Diffuse Surface Waters 152
7-10 Other MiscellaneousLaws 152
7-11 The Federal Governmentand Water Law 153
7-12 ConstitutionalBasis for Federal ProjectDevelopment 153
7-13 Government Liability 156
8 BENEFIT-COST ANALYSIS 161
Project Evaluation
8-1 Feasibility Tests 161
8-2 The Need for Testing Economic Feasibility 163
8-3 Defining Benefits and Costs 163
8-4 Benefit-Cost Categories 164
Benefit-Cost Measurement
8-5 DirectPrimaryBenefits 169
8-6 IndirectPrimary Benefits 171
8-7 Land-enhancementBenefits 171
8-8 Secondary Benefits 171