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CALIFORNIA WATER PRICING Case Solution & Answer

CALIFORNIA WATER PRICING Case Solution

Impact of Marginal Cost Pricing System on Agricultural & Total Urban Consumption

            The implementation of a marginal cost pricing system would be highly significant on the Agricultural sector and the reason for this is that about 85% of the total water of the state is utilized for irrigation purposes. Apart from this, farmers in California usually pay less for the consumption of water as compared to the residential and urban users of water. This difference is much more significant in those areas which are highly dominated by the farmers.

One of the recent studies which had been conducted by the Los Angeles petrochemical firm shows that the average price of water per acre foot paid by the farmers was just $ 10 where as the average price paid by the urban users for water consumption was on average $ 100 per acre foot.However, based on this, if the current water pricing system is changed to a marginal pricing system, the impact on agricultural consumption would be almost indifferent in some regions only and the reason for this is that the current agricultural water prices are very much closer to the marginal cost in some regions and in most of the regions, the marginal cost is lower.

However, this would not be true for all the regions, since different regions have different costs of water consumption and production for different crops. On the other hand, the impact of the marginal cost pricing on the water consumption by the urban users would be positive as it would reduce the price of the water for them and they are also considering asking for a nationwide legislation to price the water according to the marginal cost of each district. This is going to have increased consumption of water by the urban users.

Impact of Marginal Cost Pricing System on Agricultural Markets

            The impact of the marginal cost pricing system on the agricultural markets of the crops would be different for different region and for each of the different crops. Most of the variation in the average prices of the waters occurs in Basins. For instance, if we look at exhibit 4 of the case, then it could be seen that the highest impact of marginal cost pricing system would be on Imperial Valley Basin and the lowest impact would be on the North Coast basin. Therefore, the demand for the water would increase in latter basin and it would decline in the former region.

On the other hand, if we look at exhibit 5, then it could be seen that the highest average price increase for water by crop would be for Lettuce crop and the lowest average price increase would be for the irrigated pasture, rice and walnuts crop. Therefore, again in this case the supply for Lettuce crops would decrease as the price for the farmers would be increased and the supply for the walnuts, rice and pasture would increase more than any other crops.

In terms of the market equilibrium, when the supply of a particular crop would increase, then its price would decline and the demand for that crop would also increase and vice versa. As a result, the overall market would adjust itself to a level of equilibrium. The high cost crops would enhance the well being of the consumers and the low cost crops would enhance the well being of the producers of these crops. The impact of this policy is shown for the rice crop in the appendix. It shows the increase in the de

Impact of Marginal Cost Pricing System on Production Costs of Farmers

            If Clifornia moved to a marginal cost pricing system, then the impact upon the production costs of the crops would be different for each of the crops, based upon a range of factors. These differentials are analyzed one by one as follows:……….

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