Abstract

The growing demand by countries in the eastern Mediterranean over the waters of the Jordan and Yarmuk Rivers, and the highly depleted coastal and mountain groundwater reservoirs, raise the need to explore ways and means to ameliorate existing and expected water scarcity. Economists have for some time proposed ways towxds more efficient exploitation of existing water supplies, specifically by employing market incentive mecha- nisms in order to encourage voluntary water sharing among countries and regions. Sucir trading schemes may involve two or more countries. It can be shown that such schemes - given any initial assignment of property claims to water resources - can often lead to increases in the welfare of the countries concerned.

The paper proposes two specific mechanisms for international markets in water claims in the eastern Mediterranean region, in which parties voluntarily engage in such trades, as they would expect to gain real benefits from these transactions. Simulation exercises with real data show that - as is true for any opening of markets to international trade - that all parties in the region might benefit to a greater or lesser degree from auctions of water

* Corresponding author. This work is based on work carried out under, and funded by the European

oundation. “Environmental Science and Society Progra

We wish to thank the members of the Mediterranean

Giiran Mgler of the ESS Steering Comm ee, for helpful comments and

We also wish to acknowledge the corn nts of ~a~~ci~ants at two wor

(Israel), and Milan (Italy), and two ano ous referees. The assistance

the computer programming and mathe

092%7655/94/$07.00 0 1994 Eisevier Science B.V. All rights reserved

SSDI 0928-7655(94)00019-C

,704 N. Zeitouni et al. /Resource and Energy Economics 16 (1994) 303-319

claims, either from actually using imported water or from the monetary gain expork

k’q~~ds: Water market mechanisms, - Water allocation; Water claim; Middle East

JEL classification: Q25

from water

Water scarcity and water pollution are today viewed by many as the most urgent environmental problems facing the region, and could result in famine, economic crises and even regional wars. Scarcity of fresh water has thus been judged to be the number one environmental problem facing the countries of the region (The World Bank and The European Investment Bank, 1990; Kolars, 1993; Wiot, W$). Some have termed the situation as the era of “the geopolitics of water,’ ’ with water taking over the role of oil. Qne can cite many examples. Some of the most dramatic involve the conflict between Egypt and Sudan over the waters of Nile; the concern of Iraq and Syria over the Turkish Anatolian project; the growing demands by Israel, Jordan, the West-Bank, and the Gaza Strip over the waters of the Jordan River and the highly depleted groundwater coastal and mountain reservoirs.

Economic relationships, such as international trade, which benefits all parties concerned, may help reduce political tensions arising out of resource conflicts. At the same time such trade would result in a more efficient region-wide utilization of the resource. Furthermore, it is also well known from economic theory that under certain conditions a decentralized market mechanism - where trade is carried out on a voluntary basis - would yield that efficient outcome. Thus, water economists have recognized that a market for water rights would achieve the efficiency and flexibility of a competitive water allocaiion (Ehe,art and Lyon, I983; Howe et al., 1986; Saliba, 19137; Bumess and Quirk., 1979).

As an aside, it should be emphasized, however, that economic rationality ought {lot be confined to the international trade arena; it applies with equal force to the domestic pricing and efficient resource use. When any resource - water is no exception - is priced below its real price (which should reflect extraction and delivery costs, including capital costs, as well as scarcity or rent value at source), scarcities are liable to emerge. For h.istorical and political reasons, this problems concerns par-tic larly water use in the agricultural sector. I..Inder pricing is liable to create artificial carcities, and vice versa appropriate pricing may turn a water-de-

M. Zeitouni et al. /Resource and Energy E~.~n~~ic~ 16 C1994) 30.%-319 30s

e welfare losses resulting from each mechanis when it fails to fully replicate the Social Planner. The two proposed economic mechanisms are: (ai a market in which claims are auctioned off, say by an international water bank, on a percentage basis, and where the potential water demand countries bid for a share of an uncertain quantity of water of the potential supply country, and (b) A market in which priority claims are auctioned by the bank, and where potential demand countries bid for a slot in a queue; after they obtain a certain place in the queue, they receive a claim entitling them to purchase as much water as they need, from the quantity left by bidders with higher priority. We use water supply and demand data from Middle Eastern countries, which would be potential candidates for such trades. In Section 2 a brief description of the best allocation of water that results from a social planner decision is followed in Section 3 with the rational and characteristics of the markets allocations. Section 4 presents the illustrative case study, which deals with water re-allocation between Israel, The West Bank and Gaza. A number of concluding remarks are offered in Section 5.

2. Water allocation by social planner

Consider that there are N supply sources with non deterministic quantity of water and A4 potential demand countlies. It is assumed that each country has enough water to meet its minimal needs. Potential demand countries, however, may benefit from consuming more than is currently available to them. To simplify the analysis, we assume that variable costs are considered.

water ;he Let:

delivery system already exists, and only

qij be the amount of water supplied by source j to consumer i, La* j be the amount of water supplied by country j. q* j = C;qij, j = 1. . . N, qi * be the amount of water consumed by country i. qi * z Cjqijy & be the amount of water available to source j. 4; are assumed to be independent stochastic variables with known means E( &>, ’

Cii(q) be the cost function of transporting q units of water from source j to country i. This cost is assumed to be paid by the consumers. QQq 2 0, a2”ij / i$z r c).

D,/(q) be the inverse demand function for water of country i, S,(q) be the inverse supply function in source j.

The planner’s problem is to determine in each period the planned quantities that a.re to be transferred frcm each and every source j to each country i; the price would be determined ex ante from the supply functions. planner will optimize his objective function by planning available supply and allocate the water t

Each of the contingencies is a determinis knows t

306 N. Zeitouni et al. /Resource and Energy Economics 16 (1994) 303-319

realization, the planner maximizes the sum of net benefits that are derived from consumer and producer surpluses less the conveyance cost,

Substituting Cj4ij for qi *, and Ciqij for q .+.j in the objective function, the Lagrangian form yields:

Differentiating (2.2) with respect to qij and hj and equating the derivatives to zero, gives the first order conditions for optimal ex-ante allocation of water among the countries. The first order conditions are as follows:

( actj

Dt(qi*) - - a4ij I -Sj(q*j) -Aj=O Vi, j V-3)

Aj(4*, - cjj)=Q, Aj2Q Vj (24 hen the quantity of water available is not binding, then there is no scarcity in

country j, and therefore Aj = 0. Condition (2.3) implies that the demand of country i (or the willingness to pay for an additional unit of water in country i) is equal the marginal cost of extracting water in source j plus the marginal cost of transferring the water quantity qij from i to j. The differences in transferring cost may vary with distance from source j to country i, and therefore, the price of water would vary accordingly. Note that for i = j there is obviously no transfer

st, so condition (2.3) reduces to the usual condition of demand equals supply. hen the quantity of water supply in country j is binding, SO that q* j = ~j, then

ifrom (2.4)) A, 2 0, SO that the scarcity rent of water at source j should be added to transportation cost, to reflect the true opportunity the cost of water from the source.

N. Zeitouni et al. /Resource and Energy Economics 16 (I

even if it were imposed on potential participants in a ter reallocation scheme, it is li constrained by political forces, because the principles gui ing the socid planner’s decisions might not necessarily reflect the best interest of each individual country

rticipating in water allocation program. Some individual countries may ieve higher enefits without central intervention and therefore would be

reluctant to participate in a program developed by a central planning authority, which would aim to maximize aggregate benefits. Furthermore, a country may be risk averse with respect to its water supply, whereas the planner is assumed to be risk neutral. These differences in attitude between planner and participants could render the central planning institution a fragile entity, resulting in partial compli- ance, and creating an incentive to cheat in order to achieve higher levels of individual benefits.

If it were possible to form a regional market of water, it would reallocate the water in an efficient way. It is possible, however, that due to the small number of participants in this market, prices will fail to reflect the scarcity value of water unless they are set initially according to their true value that is reflected by the shadow prices that arise from the social planner optimization. However, because of the uncertain nature of the water supply and lack of storage facilities, an international water market is unlikely to arise. Therefore, one should look for a way to let market forces influence countries toward a more efficient water allocation, by creating a good that would be of a certain nature on one hand, and enable the reallocation of the uncertain water supply on the other hand. Such a good is water claims.

A creation of markets for water claims would, in theory, achieve the efficiency and flexibility of a competitive water allocation (Eheart and Lyon, 1983; Howe et al., 1986; Saliba, 1987; Bumess and Quirk, 1979) if it was feasible, although markets in water claims do not resolve the uncertainty presented to the users because of the stochastic nature of water supply (Eheart and Lyon, 1983; et al., 1933) However, the number of potential participants in such a mark Middle East, is very limited, and a market for water claims that may therefore bound to be very thin. Such a thin market is unlikely to provide an optimal allocation of claims.

A third option that is as efficient in theory as water markets involves auctioni the uncertain water quantity among countrie for it. ln this paper we explore the efficiency of water allocation that re auctioning water claims in a sealed bid auction. urchasing claims does not total

resolve the uncertain nature of the increases the expected available q flexibility in planning than would b resources.

claims for redistribution of water.

N. Zeitouni et al. /Resource and Energy Economics 16 (19941303-319

is that countries engage in (say, on annual basis through longer contracts) claims using their Surplus countries

off these to shortage Countries submit sealed bid which they their offer for the In this we make (heroic) assumption each one the shortage possess all necessary information the distribution states of supply at of the as well the demands other bidders. optimization of bidder is calculated under clearance conditions, that a behavior on

bidder’s side be to for all information in maximization. Under condition that bidders do form coalitions, is likely a seller

receive different from different if they not have preferences for

3. I. Trading percentage claims

A percentage claim is a contract that gives its owner the right (and the obligation) to purchase a certain percentage of the commodity. The countries interested in purchasing additional water would buy these claims from countries with warer surpluses in a given year. A country may submit a bid to purchase a claim on a certain percentage of an quantity of water from each of the sources. The size of the bid is derived from each bidder’s optimizing with respect to its net economic gain from water use, i.e., the benefits from water consumption minus the amount paid for the percentage claims. It can be shown that equilibrium in the market for percentage claims requires that each consuming country gets an amount of water proportional to its bids for claims from each respective suppliers. At the optimal point its bid would equal the marginal benefit of water.

the Consider such a country i, that wishes to purchase a claim on “ij percent from

unknown quantity Gj of jth country’s water. Country i’s bid to purchase a desired quantity of water aijGj from the stochastic amount ~j is bij. It is derived from country i optimizing its expected net social welfare from water: the benefits from water consumption minus the amount paid for the claims:

q) dq - bij i= I... M

i i W)

The share of a demanding country i of the water of supplying source j is proportional to the size of i’s bid,

aij

bij =-

bkj k

W)

zes (3.1) subject to its

IV. Zeituuni i-’ al. /Resource and Energy Economics 16 (1994) 303-319 309

knowledge about the market (3.2). Substituting (3.2) for “;j in (3.1) and taking the derivative with respect to b,j yields the first order condition to this optimization.

This means that the bid on the marginal percentage country i wants of j’s water

(I /(aaij/‘bij)) s i equal to the expected marginal benefits from this wate The bidding process described above yields a Nash equilibrium among the

demand countries. Since each buyer maximizes her demanded quantity, given the demand of the others, no buyer would like to change +he bid because it would have provided her with the share of claims she wished to buy in the first place.

3.2. Trading priority claim

When countries bid for priority claims, they actually purchase a prioritized option to purchase supplies left by parties with a higher priority claim and ahead of parties with lower priority claims. The final outcome of this process is that priorities are distributed among bidders according to the size of the bids. The highest offer is granted priority of all others with smaller offers. The second highest offer is given second priority and so on. It can be shown that the amount country i will pay for the k place in the queue for country’s j supplies will then be proportional to the stock of water available for the k consumer from country j.

A form of priority claims in water allocation is rather common in western U.S.A. There, water allocation is often determined on the basis of seniority claims. However, in that case the claims are a function of institutional factors, rather than market forces as in the case studied here. In other words, in our work the seniority claims are determined endogenously, through an auction market fcr priority claims, thus reflecting decentralized economic demand and supply forces rather than political negotiations.

Purchasing a priority claim with kth seniority gives the country the kth place in a queue of consumers of water. There are k - 1 countries that can purchase their respective desired water quantities from source j before i may exercise its claim. The expected water quantity to the holder of the kth claim therefore depends on the a.vailability of water to the senior claim holders; it does not get anything if Gj S Cfi :q,j, it gets ej - Cfr:q,j when c:r 114rj < 6j < Cf= , qlj, and it gets all its requested quantity otherwise. All potential consumers bid for the water, and the priorities are distributed according to the bids. The highest offer is granted priority of all others with the second highest offer being given second priority and SO on. The amount country i will pay for the kth place in the j country queue will then be proportional to the stock of water available for the kth consumer from country j. Let us rewrite the expected benefits of country i: \

/“‘Di( q)dq- i- (3 I

0 i

310 N. Zeitouni et al. /Resource and Energy Economics 16 (1994) 303-319

where: bii( l ) is the bid function of country i to jth water, and it is proportional to the available stock of water, d ,*, is a binary variable that equals one if country m is before country i in the queue for jth water, and zero otherwise. The choice of the seniority request is derived from country i’s benefit maximiza- tion:

max ~%,‘L,~

s.t.

E / y’*Di( 4)dq - iU,I 0 i i

di,lj + d,,j = 1 W)

Problem (3.5) is solved for all bi,i, and equilibrium bids for each place in the queue is determined under the assumption that all bidders are rational and share the same information about the water quantity distributions. Country i would submit the function bij( - ) as its bid for j’s water. Once country j receives the bids from all the demand countries, it would order the queue such that its benefits from water sales are maximized, and then collect t e bid payments. Ex ante, given that the type of water claims is priority claims, each water demand country cannot do better than choosing to maximize its expected benefits from water. Since each country does its best under the expectations it holds with regard to the behavior of all other bidders, maximizing its own net benefits is the best strategy it can employ when acting independently.

ve e e

4.1. The setting

e describe an application of the three Ilocation schemes (Social Planner, percentage and prio claims) to data from several Middle Eastern countries. In general, the eastern editerranean region can be divided into countries which are relatively rich in water and those that are not. he major sources of potential water

ypt, Turkey and Iraq. Shortages are most common in nk and Caza, and so cwhat less severely in Syria and

otentially beneficial projects, however, are not confined to the

could very well f-dkXt inefficient

N. Zeitouni et al. / Resource and Energy EcorloI?~ics IO (1994 XW-319 311

transfer of water from regions where it is found in relatively plentiful supplies to water-poor ones. Conceivably7 Israel could help in replenishing the est ank aquifers in exchange for getting Nile water for its arid Negev region. Another sharing project would involve storing water from the Yarmuk river in the Sea of Galily for use by Jordan, Israel, and the West Bank in dry periods, or dammin lower part of the Jordan river. Yet another project might involve a desalination project for several countries, the joint exploitation the Litany river by Israel and Lebanon to generate hydroelectric power, and so on.

To illustrate, consider a proposal (Kally, 1986) which would involve four potential supply sources (annual basis): ( 1) a relatively small (1,300 mil. m3, or MCM) quantity of water from the Nile river basin, based on current potential and consumption; * (2) Israel’s fresh water supply (1,5GO MCM); ’ (3) the West (WB) (110 MCM) and (4) the Gaza Strip (GS) (70 IvICM). 4 The sharing schemes are dealt with within the framework of the two market mechanisms proposed here. The four potential demand (use) regions considered here, are: (1) Israel (without the Negev); (2) the Negev, which for exposition purpose is used here as a distinct use region; (3) the West Bank and (4) Gaza.

The analysis does not include Egypt as a demand entity. Rather, it assumes that Egypt uses a fixed quantity of Nile water according to its needs, which in turn determines the surplus available for diversion. The reason for this exclusion is simply to limit the scope of the analysis. An inclusion of endogeneouse demand for the Nile water would have to include local water arrangements Egypt has with other riperians of the Nile, which would complicate the calculations beyond the scope of this study.

Due to the lack of satisfactory stl 2dies about overall water demand for the regions under consideration, aggregations of crop patterns were used to calculate the value of marginal productivity of water in agriculture. 5

The quantity demanded in each region is composed of two components: A fixed quantity of water per capita for domestic and industrial use multiplied by the population size (see World Resources, 1990), and demand for agricultural use. This was determined on the basis of estimates of the marginal value of water.

Water transportation costs were based on Kally (1986) and on the estimated costs

2 This is based on certain assumptions regarding the Nile basin which may or may not be valid at this point of time (see Krishna, 1988; Shanin, 1989, and Whittington and Haynes, 1985).

3 Includes all the fresh water in Israel, comprising of the two major aquifers (Naff and Matson, 1984).

4 Estimated quantities for the West Bank and Gaza are based on Kahan (1987). ’ The specific form of the demand function was assumed to be of the constant elasticity variety:

qi = App, where quantity (4,) is given in MCM, price pi is in U.S. $ per MCM, and A and (Y are coefficients. The calculations of the value of marginal productivity of water were carried for aggregations of crop patterns. Crop patterns and water consumption data for Israel and the Negev were

ken from Agricultural Statistical Quarterly (19921, and fro an (1987) for C-sza an est

ark

312 M. Zeitouni et al. /Resource and Energy Economics 16 (1994) 303-319

Table 1 A social planner’s allocation without Nile water

Demand Use level in MCM Economic

regions Israel West Gaza Total benefits

total Bank use (mil. $1

Israel 742 0 0 742 1145

Negev 427 14 0 441 371

West Bank 132 96 0 228 225

Gaza 200 0 70 270 329

Total supply 1500 110 70 Shadow price 0.29 0.46 0.46

in $/CM

of diverting water from The Sea of Galilee to the central and southern parts of Israel (Shamir et al., 1985). They include maintenance and operation cost, as well as capital cc;sts for the delivery system. 6

4.2. A social planner allocation

The incorporation of the Nile water provides opportunities for trade and also increases the total quantity of water available to the region. In order to get a better perspective cf the role of water from the Nile river basin we have explored two scenarios, one without, and one with Nile water.

Tables 1 and 2 summarize the social planner allocation in these two scenarios. It can be seen from Table 1 that, even without the Nile, regional reallocation of water would result in an increased regional net benefit. In such a reallocation scheme, Israel (including the Negev) uses 1183 MCM. Some of the water that goes to the Negev is diverted from the West Bank (14 MCM). The West Bank itself gets 228 which means that it more than doubles its present water supply. Gaza us CM. Part of it, 200 MCM, is diverted from Israel, and the rest comes from local sources. ater is transferred from Israel to the West Bank and to Gaza, because the latter ve higher shadow prices for water scarcity. The solution indicates that an upper limit for the price for water from new projects is 0.45 $ per m3 ore expensive projects would not be justified. water from the ncorporated into the analysis (Table 2), we notice t

shadow price of water scarcity is reduced significantly in all four regions. As the benefits to the entire region increase by about 12%.

e data was used to estimate the and functions in cified, ter.

their log-linear form. The cost for following osenzon (1986), by the

N. Zeitouni ct al. / Re.: mrcc an 3-319 313

Table 2

A social planner’s allocation with Nile water

Demand Use level in Economic regions

Israel west

total Bank

Gaza Nile Total

use

benefits

(mil. $)

Israel 738 0 0 457 1195 1239 Negev 398 0 0 445 843 457 West Bank 177 II0 0 147 434 253 Gaza 257 0 70 251 508 367

Total supply 1500 110 70 1300 Shadow price 0.15 0.3 0.3 0.17

in $/CM

4.3. Trade in claims

Percentage claims As in the previous section, allocations with and without water from the Nile are

considered in this section, and the performance of each proposed market mecha- nism is examined. The efficiency of the two market mechanisms is compared with that of the social planner allocation, and defined as percentage of the given allocation from the optimal (social planner) allocation.

The allocation resulting from trading in percentage claims without the Nile water is summarized in Table 3. Local water in the West ank and Gaza is used only for domestic consumption. Water from Israel is reallo ted in such a way that more goes to the West Bank and Gaza and less to Israel and the Negev, than in the social planner allocation. Israel gets only 1082 CM which is 93% of its optimal (i.e. social planner) allocation and its net benefit is reduced by 6%. The est Bank use is increased by 31% and Gaza by 15%. Nevertheless, net benefit for the West Bank decreases by 15%, and for Gaza by ll%, due to the wealth transfer

Table 3

Percentage claims allocation without Nile water

Demand Use and trade level in MCM and mil. $ Economic

region Israel (total) West Bank Gaza

benefits

(mil. $1 MCM % Trade MCM % Trade MCM % Trade

(mil. $) (mil. $1 (mil. $)

- Israel Z?i 45 90 0 0 0 0 0 0 1073 Nepev 403 30 54 0 0 0 0 0 0 342 West Bank 188 13 25 110 110 19 0 0 0 194 Gaza 230 15 31 0 0 0 70 1OQ 12 297

Total 1500 100 200 11p 119 7 12

314 N. ZtGtouni et al. /Resown* and Energy Economics 16 (1994) 303-319

Table 4

Pcrccntagc claims allocation with Nile water

Dc-mand

region

Use and trade level in MCM and mil. $ Ec~n _jmic

Israel (total) Nile West Bank Gaza ncnefits

MCM % Trade MCM % Trade MCM % Trade MCM % Trade

(mil. $) (mil. $) (mil. $1 (mil. $1

Israel 688 46 48 454 35 36 0 0 0 0 00 1189

Negcv 391 26 27 502 38 40 0 0 0 0 00 419

West Bank 207 14 14 128 110 10 110 100 12 0 00 234

Gaza 214 14 15 216 16 17 0 00 70 100 7.6 342

Total 1500 100 104 1300 100 103 110 100 12 70 100 7.6

associated with the purchase of claims. The total regional net benefits decrease by 9% compared with +lic optimal allocation. 7

Table 4 describes the final outcome of inter-country trade for our illustrative example, when water from the Nile are incorporated in the trade. Israel sells 28% of its supplies to WB and GS, for a total of $29 mil. (note that these are the sums paid for the percentage bids, not directly for the water itself, hence different countries may end up paying different per-unit prices), while it would buy 956

CM (Israel - 454 MCM and Egypt - 502 MCM) and pay Egypt the total sum of $76 mil., while WB and GS together would buy 26 MCM from Egypt and 28

CM from Israel. All the other trades are fictitious, as they involve internal buying and selling.

When water from the Nile is incorporated (Table 4), benefits increase relative to the previous case, as expected. However, payment to Egypt for providing this water should be deducted from the benefits of the use regions. This transfer of wealth reduces the total welfare of the region to 89% of its level under the social planner. The percentage market allocation provides the southern part of Israel a grater quantity of water from the Nile than is socially optimal, and in turn results in the sale of a portion of Israel’s water to The West Bank. Thus, the West Bank gets more from Israel and less from the Nile and Gaza gets less from each source, compared with the social planner solution.

Priority claims hen allocation is determined ’ in a market for priority claims without orating water from the Nile (Table 5), the West Bank and Gaza consume

their own domestic water without any transfer of water between them. Israel and

ough payments to lsrael arc included, they net out in the overall regional welfare

c

results are specific of t nique that was used to obtain the numerical

Table 5 Priority claims allocation without Nile water

Israel (total) West Bank Gaza

MCM Place Trade (mil. $)

MCM Place Trade Place Trade hnil. $) (mil. $1 (mil. $1

Israel 885 1 206 0 2 0 0 3 0 945

Negev 483 2 84 0 4 0 0 4 0 296

West Bank 2 4 0.2 110 1 I5 0 2 0 178 Gaza 131 3 18 0 3 0 70 1 9.6 285

Total 1500 308 110 15 70 9.6

the Negev are first and second in the queue, Gaza is third and the West last. Thetefore, Israel and the Negev get more water than in the optimu also buy more water than in a market for percentage claims. As a result, Gaza and the West Bank are each left with a smaller allocation, and the regional net benefits reach only 82% of the optimal net benefits.

Incorporating water from the e river in the trade in priority claims changes the picture somewhat (Table 6). ow Israel (without the Negev) is still first in queue because of the lower transportation cost, followed by the West Bank in second position. The Negev and Gaza step down one elate in the queue because once Nile water is available, the importance of the Israeli source diminishes since it is cheaper to haul Nile water to these regions. This is also the reason that Gaza is first, and the Negev is second in the queue for Nile water, while Israel is third and the West Bank is last. This market mechanisms reduces overall regional net benefits to 81% of the optimum, because the first two demand regions in each queue get more water than the optimal allocation, while the last two regions get less.

Table 6 Priority claims allocation with Nile water

Demand Use and trade level in MCM and mil. $ Economic

region Israel (total) Nile West Bank Gaza

benefits

(nail. $) MCM Place Trade MCM Place Trade MCM Place Trade MCM Place Trade

(mil. $) (mil. $1 (mil. $) (mil. $1 --

lsrael 896 1 114 246 3 19 0 2 0 0 2 0 1052

Negev 284 3 22 513 2 58 0 3 0 0 3 0 360

West Bank 321 2 46 04 0 110 1 8.4 0 4 0 216

Gaza 04 0 541 1 99 0 4 0 70 1 5.3 326

Total 1500 104 1300 176 110 8.4 70 5.3

316 IQ. Zeitouni et al. /Resource and Energy Economics 16 (1994) 303--319

GS now bids for almost half of the Nile supplies, through purchasing the first place bid (for d sum of $99 mil.), while WB would pay $46 for a second-place claim to Israel’s surplus water (and none for Nile waters). The Negev region consumes about the same quantity of water from the Nile, but for a higher su

since it must bid with CS (ar.;l ends up with only a second-place claim). Israel now uses more of its own waters (recall that in the percentage claim case it sol 421 MCM to GS and WB, now only 321 to WB).

It is noted that total annual regional benefits are higher by about 12% for the percentage claims mechanism compared with the priority claims one ($2,184 mil. vs. $1,954 mil.). This difference, however, is reduced PD 7% when Egypt’s benefits from selling percentage ($103 mil.) and priority ($176 mil.) claims, respectively, are added to these sums. Egypt receives addi’.ional 70% in monetary gains under the priority claims scheme, but this is reversed in the case of Israel. So, solely on economics grounds, one in general would not be able to say which of the two schemes would be preferred by whom. Administratively, they would both seem to involve rather elaborate institutional arrangements.

Note that even though overall efficiency is larger under percentage claims mechanism (Table 3, Table 41, .the supply regions benefit more from the selling of priority claims. This is especially important with respect to Egypt, since it does not play a double role (as does Israel) of seller and buyer. When selling priority claims, Egypt collects 25% more revenues than when selling percentage claims. Israel also colltcts 29% more revenues when the Nile is included, but it has to pay 58% more to Egypt. Overall Israel’s net benefit when it “sells” percentage claims, is 16% higher than when it “sells” priority claims.

The study indicates that trade in water claims could improve the welfare of each participating party, and increase the efficiency of regional water use. For the cases studied in this paper the resuPs show that a percentage claims mechanism is relatively more efficient than priority claims. However, the priority claims scheme

ly be favored by the parties with a surplus of water, since this mechanism transfers more wealth to the selling parties. Two options were consid- ered: trading only local water, and trading local water augmented by water from the Nile. Although transporting water from the Nile may not be politically feasible at the moment, it was interesting to note that all parties involved in the trade ‘including Egypt!) might benefit.

The notion which underlaid this research was that trust and peaceful co-ex- istence could be enhanced by collaboration through economic incentives - in the form of joint s in water claims, or other arrangements. Such measures wou a more efficierrlt utilization of scarce resources, thereby increa

effective confident ains from trade, as s

easures cou of the nations inv with shared, interwoven econom institutional bark benefit from an

These aspects concern issues such as who should decide what, if any, mechanism will be adopted? What will be the bargaining framework for anivin similar decisions, and what kind of supranational agency will be enforce them? How, and who will be entrusted with the resolutiorr of equity and re distribution issues if and when they arise ? It is of course imperative that these issues be dealt with, but they were beyond the scope of this project due to time and financial constraint. However, even without delving into these important, but complicated issues, the study has clearly demonstrated that economic incentives can be harnessed to the cause of buttressing the peace in the iddle East.

Appeadix

The bid function of country i to country j’s water b$ in Eq. (3.4), is specified as

bij = k( qj - Cdirnjqmj)T

m

(A-1)

where k is a coefficient of proportionality that is equal to the calculated unit supply cost of water and it is the same for all supply countries. In our case this coefficient is obtained from the percentage claims model:

k b;

=- (A.2) 4ij

where b{ is demand country i’s bid and 4ij is the amount of water supplied by country j to country i. Since

and this is the solution to an opti and k does not depend on i, j.

The numerir results were obtained as follows. Consider the maximization

ax (Y, - dimjy,j) (A-4)

4c,JL,

with the same restriction as in (3.5), but where dimJ are now specified as positive continuous variables. This is possi q. (3.5) is linear in dimi, and consequently its constrained maximum is achieved at ext eme points of d,,,. The last restriction of problem (3.5) ensures that dimi is always less or equal to one. In this way, the non linear optimization problem with binary variables was reduced to a problem that can be solved with non-linear optimization techniques available in any mathematical programming package (GNUS in our case).

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