Journal Article

The economic impact of restricted water supply: A computable general equilibrium analysis

Water Research, 8

Water problems are typically studied at the level of the river catchment. About 70% of all

water is used for agriculture, and agricultural products are traded internationally. A full

understanding of water use is impossible without understanding the international market

for food and related products, such as textiles. The water embedded in commodities is

called virtual water. Based on a general equilibrium model, we offer a method for

investigating the role of water resources and water scarcity in the context of international

trade. We run five alternative scenarios, analyzing the effects of water scarcity due to

reduced availability of groundwater. This can be a consequence of physical constraints, and

of policies curbing water demand. Four scenarios are based on a ‘‘market solution’’, where

water owners can capitalize their water rent or taxes are recycled. In the fifth ‘‘non-market’’

scenario, this is not the case; supply restrictions imply productivity losses. Restrictions in

water supply would shift trade patterns of agriculture and virtual water. These shifts are

larger if the restriction is larger, and if the use of water in production is more rigid. Welfare

losses are substantially larger in the non-market situation. Water-constrained agricultural

producers lose, but unconstrained agricultural produces gain; industry gains as well. As a

result, there are regional winners and losers from water supply constraints. Because of the

current distortions of agricultural markets, water supply constraints could improve

allocative efficiency; this welfare gain may more than offset the welfare losses due to the

resource constraint.


Maria Berrittella
Katrin Rehdanz - Kiel Institute
Katrin Rehdanz
Richard S. J. Tol
Arjen Y. Hoekstra
Roberto Roson


Publication Date
JEL Classification
D58, Q25, Q28