Estimating the Amount of Saving in Water Consumption under the Condition of Forming a Water Market and Examining Its Welfare Effects: A Case Study of Hashtgerd Plain in Alborz Province of Iran

The drop in the level of underground water and the subsequent subsidence of more than 20 cm of land in the plains of Alborz province of Iran has now become one of the biggest environmental concerns of the province. On the other hand, excessive extraction of underground water sources in this province will lead to a big disaster in the near future, and in order to prevent this, volumetric meters have been installed in the province. Therefore, the approach of setting up a water market in this situation is one of the best measures that can be taken into consideration. In this study, Hashtgerd Plain in Alborz province, as the most important agricultural region of the province, which consumes 87.23 percent of surface water resources and 90 percent of underground water resources in the agricultural sector, was studied in order to investigate the effects of water market simulation. In this study, the demand function was estimated using a Positive Mathematical Programming (PMP) model (aiming at estimating the equilibrium price) as it is more compatible with real conditions. The PMP and production functions of Statewide Agricultural Production (SWAP) are among the techniques used to simulate a water market and study the effects of its formation, the role of a water market in economic value changes, etc.Step 1: Zonation of the study area and collection of required dataStep 2: Solving the linear programming model and determining dual values ​​or shadow prices ​​of constraintsStep 3: Estimation of the secondary Constant Elasticity of Substitution (CES) production functionStep 4: Estimation of the original CES production functionStep 5: Estimation of the exponential cost functionStep 6: Estimation of demand functions of agricultural products based on endogenous pricesStep 7: Building the final planning model and explaining the calibrated PMP modelFor this purpose, using the information collected in the form of a questionnaire and referring to relevant organizations for the years 2015-2016, the Positive Mathematical Programming (PMP) model was estimated with the approach of regional production functions of agricultural products and the demand function was extracted. Accordingly, the equilibrium price of water in the Hashtgerd Plain was estimated 3394 IRI rials per cubic meter, which would save more than 28 percent in water consumption. With the implementation of this policy, the welfare of water buyers would decrease and the welfare of water sellers would increase. Therefore, if policies such as increasing the efficiency of irrigation systems are implemented at the same time as the water market is launched, there will be a smaller decrease in the level of welfare. It can be concluded that the required water resources were 234.5 million m3 before the formation of the proposed water market in the Hashtgerd Plain of Alborz province. After the water market formation and the application of market prices (3,394 IRI rials/m3), the use of water input will reduce to 167.32 million m3, i.e., a 28.6 percent saving in water resources. The minimum and maximum water prices are 3282 and 7282 IRI rials/m3, respectively, in the simulated market. After the water market formation, the cropping pattern will undergo changes in the region, which are different for the groups of water input buyers and sellers. The sellers tend to reduce the area under cultivation of all crops, except for wheat, due to the low water requirement of this crop, compared to the other crops. This means that the revenue from the sale of water to applicants is more than that of cultivating the crops in these conditions. The buyers will also reduce crops with high water requirements and increase the cultivation of the other crops. Increasing the efficiency of irrigation systems is one of the policies that, if accomplished in parallel with the water market formation, will lead to an increase in the welfare of water buyers to compensate for their lost welfare after the water market formation. According to the results of the calculations, the following recommendations are presented regarding water resource management using the formation of a water market:To prevent the reduction of farmers' welfare, policymakers are recommended to simultaneously implement supportive policies, such as supporting the increase of the irrigation system efficiency (and other inputs). Considering that increasing the price to the equilibrium limit will cause a sudden shock to the sector, it is suggested to first determine the minimum obtained price (3,282 IRI rials/m3) as the market price. This price is closer to the economic value and, with a saving of approximately 15 percent also covers step-wise policies of water use reduction (approved by the IRI Sixth Development Plan). Since it is possible to save water resources after a water market formation, IRI Department of Environment (DOE), as the responsible organization, is recommended to adopt a measure to prevent water extraction from the land by the water sellers and, in return, provide them with the benefits of selling water. In other words, a water market will be formed between farmers and the DOE by redeeming a portion of the shares of water rights owned by the farmers. Another recommendation of this study is efforts to change the cropping pattern in the region with the approach of cultivating crops that have higher yields and more income with less use of water. Further studies on medicinal plants are also recommended in this regard.