Water scarcity and welfare: Regulated public–private supply chain versus spot-market competition

Abstract

Despite legislation and price controls by the government and state agencies that typically assume responsibility for providing water services, water bills continue to rise. However, this has not prevented growth in overall water consumption, nor an increase in water scarcity, both of which are fueled by worldwide population growth, urbanization, and demand for a higher quality of life. Market-based competition is thought to be a promising approach to controlling water charges and managing water scarcity. We compare a spot-market-based competitive supply model for water, which determines the equilibrium price, with a supply chain approach, in which a non-profit public entity encourages competition between private water providers within the framework of a regulated, time-invariant price. We derive dynamic equilibrium replenishment and inventory policies and show that, contrary to expectations, spot-market competition does not necessarily result in greater levels of supply, nor in a lower price, than does a regulated supply chain. Furthermore, the public-private partnership can have an additional advantage in the form of both higher consumption and higher consumer welfare. However, increasing the distribution cost, and hence, the regulated price is likely to diminish the differences between the two market types.

Keywords:

• Game theory
• optimal control
• supply chain management
• control policy

Additional information

Notes on contributors

Konstantin Kogan

Konstantin Kogan is the Chaired Professor of Operations Management in the Department of Management at Bar-Ilan University, Israel. He has been a visiting professor at Technion–The Israel Institute of Technology, Cagliari University, California State University and New York University. He works in the area of control of dynamic systems and his research covers diverse aspects of operations and supply chain management, scheduling, planning, maintenance and inspection in various production and service environments. Professor Kogan’s research results have been presented in five books and over a hundred journal articles published in leading operations research and industrial engineering journals.

Dmitry Tsadikovich

Dmitry Tsadikovich holds MA and, recently, PhD in logistics management both from Bar-Ilan University, Israel. His research interests lie in the field of applied mathematics with an emphasis on investigating dynamical systems arising in various management problems as well as implementing the operations research tools in exploring and improving the operation of the healthcare and military supply chains.

Tal Avinadav

Tal Avinadav is an associate professor of operations management in the Department of Management at Bar-Ilan University, Israel. He holds a BSc in industrial engineering, an MBA in technology management, and a PhD in operations management, all from Tel-Aviv University. His areas of expertise include supply chain management of virtual products and inventory control. His papers have been published in leading journals of Operations Management, such as International Journal of Production Economics, European Journal of Operational Research and International Journal of Production Research.