CALIFORNIA STATE UNIVERSITY, HAYWARD

COLLEGE OF BUSINESS AND ECONOMICS

MANAGERIAL ECONOMICS

GUIDELINES FOR CASE ANALYSIS

California Water Pricing

I. MAIN ISSUES

1. INEFFICIENCIES IN WATER ALLOCATION AND OPTIMUM RESOURCE ALLOCATION

(i) Sharp differences in water prices across different classes of customers and distribution efficiency - good or bad? Applicability of the Equimarginal Benefit Principle versus the Beneficial Use Doctrine ("Use It or Lose It")

(ii) Is the trade-off between food consumers' well-being and other consumers' (e.g. residential water consumers') well-being adequately reflected in differential water prices?

2. PRICE RATIONING AND WATER ALLOCATION

(i) What are the effects of changes in the price rationing scheme between urban and agricultural uses?

(ii) What is the normative value of agricultural occupations versus non-agricultural occupations?

3. THE BURDEN OF HIGHER PRICES FOR AGRICULTURAL WATER

(i) How can the data provided in the case be used to determine which farmers would be relatively most damaged if they had to pay substantially higher prices for their water?

(ii) What is the impact of marginal cost pricing in terms of a representative supply and demand diagram?

(iii) What are the factors that determine the extent of the impact of the increase of water prices on a particular crop farmer's average cost (AC) and marginal cost (MC) of production and as a result on the crop's final price? These factors may include:

(a) The magnitude of the change in the price of water inputs on different crops (Ex. 4&5)

(b) Water's factor share (see Ex. 6 and connect Ex. 5 & 6 to rank crops in order of magnitude of the combined effects of the impact of changes in the price of water inputs on particular crops and their impact on the cost of production of these crops based on the factor share of water in that crop's production

(c) Possibilities for factor substitution (as reflected by the Elasticity of Factor Substitution, EFS = {d[(inputi/inputj)]/[(inputi/inputj)]}/{d[(Pinputi/Pinputj)]/[(Pinputi/Pinputj)]} as measured by the Coefficient of Variation of Input Ratios, i.e. standard deviation across water basis divided by mean water usage, in Ex. 8) in different crops and the impact of price increase (Ex. 5) on these crops

(d) The impact of offsetting crop price increases and the factors that determine this offset (e.g. the elasticity of demand and substitution possibilities for different crops as can be determined from Ex. 9)

(e) The general equilibrium effects of market/marginal pricing on different crop prices and quantities, land values due to freeing up of and reallocation of agricultural lands and the possible beneficial effects on some crops versus others

II. EVALUATION OF ALTERNATIVES (EVALUATE EACH)

1. Do nothing

2. Raise prices charged by Federal and State authorities to some given discretionary level

3. Raise prices charged by Federal and State authorities to the marginal cost in each use (Marginal Cost Pricing)

4. Allow trading and sale of water rights under 2 and 3

5. Market pricing of water without 4

6. Privatize the water system

7. Hybrid alternatives