Water plays a very important role in both daily life of citizen and the development of city economy. Sometimes in specific area water even become a reason of war. This article aims at studying how the demand and supply of water change caused a shortage and how to eliminate the shortage through adjusting price of water in California.
Water Demand and Supply Curve.
As a public resource, water supply market is natural monopoly. Petra, H., Walter, I., & Peter, D. (2013) showed that the water demand curve usually slopes downward because the marginal value of water used is first high and then slow down. The water supply curve slopes upward due to the increasing marginal cost as the quantities of water increases. There is an initial equilibrium in the market. Price and quantities are set as P1 and Q1 according to the point A demand curve insects the supply curve. .
The Change in Water Demand.
In recent years the demand for water is increasing, mainly caused by two factors. One is income. The per capita personal income of California is increasing from $43,211 in 2007 to $44,980 in 2012 (Bureau of Business & Economic Research [BBER], 2014). As a natural resource, water is necessity good. People's income growth will cause an increase of demand of water. The other factor is population. A study from Wikipedia shows in recent years, the population of California has increased from 33.99 million in 2000 to 38.04 million in 2012, which naturally need much more water for everyday life and agriculture.
The Change in Water Supply.
The supply of water also changed. In California, the two main source of water are surface water and groundwater and surface water act as a primary provider of water. A study in Wikipedia shows only about 40% of the water consumption comes from the groundwater per year. In recent years, the drought in California directly affected the surface water. Take downtown San Francisco as an example, the historical and current data of annual average precipitation to date indicate that the drought caused a decreasing in annual precipitation in recent years (see Figure 2), in other word, a decreasing of major supply of water.