Several studies have documented that intertemporal water allocation in Hawaii (as elsewhere) is inefficient (see e.g., Moncur et. al., 1998). The result is widely expected to be early depletion of groundwater resources and the resulting need for using expensive and exotic technologies such as desalination. The problem is further complicated by the presence of saltwater underneath most of the freshwater lenses in Hawaii. Increasing groundwater extraction over time will drive the freshwater head levels lower until the existing well installations will start to pump out saltwater. Once the wells become saline, it is very hard to reverse the process. The consequences of these conditions, in terms of the economic value of waste, are unknown. Moreover, recharge of groundwater aquifer is affected by the condition of forested watersheds. Amount and nature of vegetation cover affects the rate of recharge and the amount of groundwater stored in an aquifer available for pumping. Many communities have given watersheds a practice of protective zoning that eliminated the worst threats, including road construction and subsequent urbanization that significantly reduce permeability and recharge rates. Zoning alone may no longer be sufficient for meeting the increasing demand for fresh water, however. Increasing threats to forest quality, including change in forest composition due to the rapidly growing problem of invasive species, may justify significant conservation expenditures. Maintenance of watersheds needs to be considered in an integrated framework in order to assess the size of the problem and the potential gains from policy reforms. The overall objective of this paper is to combine existing hydrological, engineering, and economic knowledge in order to estimate efficient water use in the Honolulu aquifer zone on Oahu, HI. We compare welfare gains under efficient pricing and usage with welfare under current pricing and usage. In addition, we incorporate the effects of watershed conservation in the form of probabilistic changes in recharge. We then compare the welfare gains from efficient pricing without water conservation to that with watershed conservation. Finally, we articulate practical pricing schemes (particularly block pricing) for achieving efficient use with return of water pricing revenue back to the consumers. We derive efficient water use and prices over time for the study area with and without the watershed conservation plan proposed by the state Department of Land and Natural Resource (DLNR). Present values of status-quo (pricing-at-cost), efficiency pricing alone, and efficiency pricing with additional conservation spending are compared. We show that efficiency pricing alone provides substantial welfare gains over status-quo. Efficiency pricing combined with watershed conservation improves the welfare further. Under plausible parameter values, the fall in efficiency prices afforded by conservation is more than enough to finance the conservation expenditures. This is a 'win-win-win' for water consumers, taxpayers, and environment.


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