Determining the Economic Benefit of Watershed Conservation for Urban Water Supply Based on Scarcity rent for Water and Consumer Surplus

Watershed conservation aimed at urban water supply not only holds ecological significance but also offers substantial economic benefit. Unrestricted land use can affect raw water quality and undermine current water purification efficiency, leading to more costly treatment processes and higher water tariffs. This study adds to the water resources management literature by quantifying the economic benefit of watershed conservation, which ensures the supply of affordable, high-quality urban water. It bridges the economic connection between the two ends of the water supply system: the source and the user. The economic benefit of watershed conservation was measured by assessing the loss in consumer surplus, as any fluctuation in water tariff directly impacts consumer surplus. Using the point expansion approach, this study derived the demand function and incorporated the scarcity rent to estimate the economic value of the in-situ water. Including the marginal scarcity rent for water in tariffs serves an important purpose of safeguarding the interests of future consumers by signaling to present users the future value associated with the use of a scarce resource. The municipality of Caxias do Sul, in southern Brazil, served as a case study. The findings showed an annual reduction in consumer surplus of up to 4.66 million USD when watershed conservation is not enforced, thus confirming that investing in watershed conservation yields significant economic benefit.