A Multilevel Approach to Planning for Capacity Expansion in Water Resource Systems

Supply and demand models are developed as aids in planning future water resource expenditures. The supply model yields least-cost schedules of projects to meet assumed levels of demand. The demand model, conversely, allocates available water supplies within a regional input-output economy to most efficiently utilize the available resource. As more and more water is made available at various future points in time, the extra amount will be used for less important and productive uses. However, as additional water supply is planned, the costs of supplying the resources become excessively high, since less efficient supply projects must be built. For these reasons, the supply and demand models are placed in a hierarchical framework whereby the supply/demand projections are adjusted so that the additional costs of supply match the additional economic value of the supply. This requires a formal extension of classical benefit-cost analysis, which is referred to as dynamic benefit-cost analysis.