Chicago's water market: Dynamics of demand, prices and scarcity rents

Chicago and its suburbs are experiencing an increasing demand for water from a growing population and economy and may experience water scarcity in the near future. The Chicago metropolitan area has nearly depleted its groundwater resources to a point where interstate conflicts with Wisconsin could accompany an increased reliance on those sources. Further, the withdrawals from Lake Michigan is limited by the Supreme Court decree. The growing demand and indications of possible scarcity suggest a need to reexamine the pricing policies and the dynamics of demand. The study analyses the demand for water and develops estimates of scarcity rents for water in Chicago. The price and income elasticities computed at the means are -0.002 and 0.0002 respectively. The estimated scarcity rents ranges from $0.98 to $1.17 per thousand gallons. The results indicate that the current prices do not fully account for the scarcity rents and suggest a current rate with in the range $1.53 to $1.72 per thousand gallons.