ECF6105: Economic Analysis For Business -Tap Water From Groundwater Resources - Essay Writing Assignment Help

Economic Analysis For Business Assignment

Assignment Task

Australian cities suffer water shortages to the extent that household watering days and winter reticulation bans are common. One alternative source of water is water derived from desalination processes.

Find four scholarly references that compare and contrast the costs of tap water produced from groundwater and dams with tap water produced by desalination plants.

Summarise, using a table, the findings in these references. The first column would provide comparison headings. The second column could show groundwater and dam characteristics and the third column could show desalination characteristics. Discuss the table.

Explain why governments would either (1) build and manage desalination plants OR (2) contract out the building and managing of desalination plants to private industry. (Hint: See Chapter 11 for the role of governments in markets).

Suggest ONE policy that the Australian government could implement to encourage private firms to invest in desalination plants. Think of an appropriate model to include in your discussion. Explain this

policy and its impact.

Introduction

As the world population is increasing day by day and there is continuous depletion of ground water resources, before they get replenished, there is an urgent requirement for producing tap water from desalination process and this in turn has resulted in higher costs associated with it. For the past two decades the demand for producing tap water from desalination plants are on the increase. The costs of producing tap water from ground water resources and tap water from desalination plants by removing the salts from sea water are totally different and are varying over the years. This paper analyses the costs of producing tap water from both the sources and analyses the need for the government to either build their own desalination plants or to contract out to private enterprises the building and management of desalination plants.

From the table above it is clear that tap water from groundwater and dam sources were the traditional supply of water which are becoming scarce now a days due to growing water needs tremendously and also the depletion of these sources (replenishment of ground water is at a lower rate than its depletion) and hence the costs of producing them are getting higher. The supply of tap water from the process of desalination started about 40 years ago at tremendously higher costs which have decreased over the years due to technology improvement in the desalination process. However the costs of tap water extraction from desalination process is still higher than the traditional ground water sources and are having more external costs on the sea habitats(Frioui and Oumeddour, 2010). This has to be reduced in order to make tap water from desalination process a greater supply source. There are higher fixed costs in desalination process and not all the firms in the industry could set up a desalination plant easily. The process of desalination is very costly as compared to the extraction of tap water from traditional ground water sources(Zhou and Tol, 2005).

Economic model for extraction of tap water from desalination plants:

Since the production costs of tap water from desalination process is very much higher, the average costs of production is much higher than the average revenue earned as shown in the following figure.

In the above figure, we can see the costs of production for tap water from desalination process is very much higher and hence results in market failure, as the firm is not even able to cover its variable costs of production in the short run and the fixed costs are also very much higher(Hubbard et al., 2013). This results in private firms avoiding investments in desalination plants as they don’t have the incentives in the form of profits to make investments in the desalination plants. Hence we may consider the tap water from desalination plants as a merit good that is undersupplied in the economy due to heavy investments required.

What should the government do?

For this purpose, the government should either start, build and maintain its own desalination plants and supply water or either contract out to the private firms and provide them subsidies such that more number of private enterprises would be willing to set up desalination plants and sell tap water produced out of these desalination plants(Baumol and Blinder, 2012). The subsidies provided by the government would increase the supply of tap water from desalination plants at affordable prices. And this is shown using demand-supply analysis.

In the above diagram, the tap water demand is increasing, but the supply of the same is very low as the investments in the desalination plants are heavy. This has made the price of tap water higher at P and quantity sold low at Q. However when the government subsidises the costs of production, the supply will increase from SS to SS1 which will intersect the demand at a price P1 which is lower than P and will increase the quantity sold of tap water from Q to Q1. Since water is an essential item, and the demand for it is ever increasing and given the fact that ground water sources are getting depleted day by day, there is a necessity for the water industry to tap the sources of desalinated water by installing desalination plants.

The policy prescription for the government in this case for increasing tap water from desalination plants is to subsidize the fixed costs of installing the desalination plants by private firms. This will increase the supply of tap water from desalination plants as more firms would be willing to invest in desalination plants.

Conclusion:

In this paper the costs of supplying tap water from ground water resources and tap water from desalination plants have been discussed. For increasing the supply of tap water from desalination plants, it is a prerequisite for the government to either invest/open its own desalination plants or to subsidize the investment taken up by private firms to start up desalination plants. Public private partnerships in establishing desalination plants are also a suggestion.