Valuing Water for Chinese Industries: A Marginal Productivity Assessment

Abstract:     
The marginal productivity of water used for industry varies among sectors in China, but there is great potential for the Chinese government to save water by raising water prices to industry, to encourage water conservation.

Using plant-level data on more than 1,000 Chinese industrial plants, Wang and Lall estimate a production function treating capital, labor, water, and raw material as inputs to industrial production. They then estimate the marginal productivity of water based on the estimated production function.

Using the marginal productivity approach to valuing water for industrial use, they also derive a model and estimates for the price elasticity of water use by Chinese industries. Previous studies used water demand functions and total cost functions to estimate firms' willingness to pay for water use.

They find that the marginal productivity of water varies among sectors in China, with an industry average of 2.5 yuan per cubic meter of water.

The average price elasticity of industrial water demand is about -1.0, suggesting a great potential for the Chinese government to use pricing policies to encourage water conservation in the industrial sector. Increasing water prices would reduce water use substantially.

This paper - a product of Infrastructure and Environment, Development Research Group - is part of a larger effort in the group to understand the economics of industrial pollution control in developing countries.

Working Paper Series