Economic Value Approach to Industrial Water Demand Management, A Case Study of Chemical Plants

Limitations in water supply to meet the increasing demand have encouraged both planners and researchers to focus attention on water demand management, in which such economic tools as the water pricing system play a major role. A fundamental component of the pricing system is the estimation of the economic value of water, which reflects a firm’s maximum affordable water price or the ultimate elasticity of industrial water. The present study was conducted to estimate the economic value of water for basic chemical plants, excluding fertilizers and nitrogen compounds (code 2411), representing the four-digit ISIC industrial codes which account for about 14% of the total industrial water consumption. The econometric method of production function within the framework of panel data and the residual method were used. Data were collected from the Census of medium-sized businesses carried out by the Statistical Center of Iran over the period 1997–2013. Results showed that one cubic meter of water allocated to the plants surveyed creates a value of 3,7071 Rials, which shows a large gap with the current purchase price of 5685 Rials. Moreover, it was found that the present water prices account for only about 1.3 percent of the total production cost of basic chemicals, excluding fertilizers and nitrogen compounds. It may, thus, be concluded that it is reasonable to increase the present water tariffs and discriminate among the various manufacturing codes by differences in tariffs in order to achieve water demand management goals. Finally, the information emerging from the study may be exploited to improve the revenues earned by water authorities or to carry out feasibility studies of industrial water development projects.