Economic Modeling of International Water Use (The Case of the Aral Sea Basin)

The paper presents a procedure for determining an efficient price for water in areas where there has been no market for pricing. It is based on a novel mathematical innovation developed by the authors. The paper is applied to the Aral Sea region, and has since been used for the pricing of water in the Chimby Region of Karakalpakstan with interesting results. Without water pricing in this region, which is the situation at present, the most profitable crops are rice and corn. A price on water shifts the production of these crops toward an increase in livestock production. The estimated equilibrium price suggests that water use will decrease by as much as 15%, but without significant economic losses to the region. The authors suggest that water pricing is a better alternative to a water-use permits market.