JOURNAL OF NATURAL RESOURCES ›› 2020, Vol. 35 ›› Issue (2): 413-424.doi: 10.31497/zrzyxb.20200213

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Effectiveness of industrial water price leverage: Based on simultaneous equation model

HU Xiao-ji1, TANG Li2, LIU Ya-hui2, DONG Xiao-dan2   

  1. 1. School of Finance, Renmin University of China, Beijing 100872, China;
    2. School of Agriculture Economics and Rural Development, Renmin University of China, Beijing 100872, China
  • Received:2019-01-02 Revised:2019-04-03 Online:2020-02-28 Published:2020-02-28

Abstract: As for industrial water, the effectiveness of price leverage to reduce water consumption and improve the reuse rate is significant for water saving and industrial transformation and development. Historically, for a long period, it is difficult for water prices to play a role in regulating the supply and demand of water resources. At this stage, industrial water prices still have room for growth. That is why so many existing studies deal with the estimation of water price elasticity. Estimating the price elasticity of industrial water by logarithmic production function is not considered to be the reverse effect of water consumption on price, which will lead to bias in results. This research, based on the data of 216 Chinese cities in 2016, builds simultaneous equations to solve endogenous problems and estimate the price elasticity of demand for industrial water. Results showed that average results of 3SLS in China are -3.423, which is above the estimated results of agriculture and livelihood in existing literature, scilicet 1% addition of price will lead to 3.42% decrease of water consumption. At the region level, improving industrial water price is effective to save water, especially in eastern and central China. The possible reason for the highest industrial water price elasticity is that there is a large amount of non-consumptive water used in industry expressed as reuse rate of water consumption. Moreover, the assessment of the effectiveness of the policy should be based on not only the reduction of industrial water demand when water prices rise, but also the impact of water prices on water efficiency and water reuse. If the rising water price can improve the efficiency of industrial water use and promote the reuse of industrial water, it will not have a great impact on industrial economic growth to some extent. Therefore, from the perspective of characteristics of industrial water, reuse rate will be used as an explained variable to set up an equation to estimate the effect of price on water conservation. Results showed that water price and reuse rate are positively correlated, indicating that there exists negative impact of increasing industrial water price, which will be an offset by improving reuse rate of water. What is more, it also means that raising the price of industrial water can encourage the recycling of water, and finally promote the industrial development.

Key words: industrial water conservation, industrial water consumption, price elasticity, simultaneous equation