DEMAND-BASED BENEFIT-COST MODEL OF PARTICIPATION IN WATER PROJECT

The concept of consumer surplus is used to estimate the benefits from a new water source for urban water customers. This benefits«fhodel is estimated for the projected arrival of Central Arizona Project (CAP) water in Tucson, Ariz., using the parameters of a regression-based demand model. The estimated benefits to water users of the anticipated CAP water are $91 million compared to costs of $175 million at the 8.625% discount rate currently required for federal projects. Thus direct costs exceed direct benefits by $84 million over the 100 year life of the project. To keep current water customers from suffering net losses, a payment of $2,514 in 1985 dollars would be required from each new housing unit over the 100 year life of the project. The internal rate of return for the project is 4.86%, which exceeds the 3.25% rate used in the original analysis of the project. This research demonstrates the practical application of the frequently advocated but less frequently used consumer-surplus model in estimating the benefits of increasing the supply of urban water. © ASCE.