Demand‐Based Benefit‐Cost Model of Participation in Water Project

Abstract

The concept of consumer surplus is used to estimate the benefits from a new water source for urban water customers. This benefits model is estimated for the projected arrival of Central Arizona Project (CAP) water in Tucson, Ariz., using the parameters of a regression‐based demand model. The estimated benefits to water users of the anticipated CAP water are $91 million compared to costs of $175 million at the 8.625% discount rate currently required for federal projects. Thus direct costs exceed direct benefits by $84 million over the 100 year life of the project. To keep current water customers from suffering net losses, a payment of $2,514 in 1985 dollars would be required from each new housing unit over the 100 year life of the project. The internal rate of return for the project is 4.86%, which exceeds the 3.25% rate used in the original analysis of the project. This research demonstrates the practical application of the frequently advocated but less frequently used consumer‐surplus model in estimating the benefits of increasing the supply of urban water.