A dynamic micro-macro-economic model to assess water charging policies

This paper presents an integrated and dynamic coupling of micro- and macro-economic models for water resources management. As compared to conventional static micro-macro-economic coupling designs, the dynamic coupling produces time-variant assessments of endogenous (e.g., dynamics and impacts of capital accumulation) and exogenous variables (e.g., impacts of policy shifts or market trends over time). Methods are illustrated with an application to the Castile and León Region in Spain, where we: 1) assess the performance of two hypothetical water charging policies (one-time charge adjustment v. Incremental charges), and 2) compare the simulation results obtained with the proposed dynamic coupling to those obtained using two conventional static models. A key finding is that simulations under the dynamic coupling attribute lower effectiveness to water charges in reducing water use over time: 47% and -24% (dynamic coupling) water use change at the beginning and end of the simulation period vs. -46% (static coupling). Additionally, an incremental water charge has a greater economic impact than a one-time adjustment, resulting in a peak profit reduction of -8.9% compared to -5.9% under the one-time charge. Our results highlight the relevance of accounting for dynamic micro-macro-economic dynamic feedback in water policy design.