Balancing Efficiency and Inequality in a Non-Linear Multi-Regional Water Allocation Optimization Model

Abstract Accounting for green and blue water resources, this study determines the optimal allocation of water between economic sectors under varying drought circumstances, applying non-linear optimization in a multi-regional input-output modeling framework. The results are compared to the regulated reallocation of water under existing regional drought warning and emergency plans. The analysis reveals that substantial economic gains can be achieved when considering efficiency in inter-sectoral water reallocation policies, mitigating value added losses. However, such optimal water allocation leads to greater inequality compared to the current drought policy measures. Extending the model and combining efficiency and equality concerns yields a production possibility frontier for second-best allocations that accounts for the distributional impacts of water reallocations under droughts. Notably, our findings demonstrate that there is potential for a more efficient distribution that is equal to the distributional impacts under the existing drought warning and emergency plans at lower total economic resource scarcity costs.