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The Department of Environmental Economics and Management

The Robert H. Smith Faculty
of Agriculture, Food and Environment
The Hebrew University of Jerusalem

Herzl 229, Rehovot 7610001
Fax: 08-9466267

Department Head:
Dr. Ohad Raveh, Tel: 08-9489373

Head of the teaching program:
Dr. Ohad Raveh, Tel: 08-9489373

Miri Arazi, Tel: 08-9489230


Bar-Nahum, Z. ; Reznik, A. ; Finkelshtain, I. ; Kan, I. Centralized water management under lobbying: Economic analysis of desalination in Israel. Ecological Economics 2022, 193, 107320. Publisher's VersionAbstract
This paper studies the impact of lobbying on policies in a centrally managed water economy. First, we develop an optimal control model in which long-run water-management policies are an outcome of negotiation between policymakers and a politically organized farming sector. We show that under equilibrium conditions in the political game, larger political power of the farmers' lobby leads to faster exhaustion of naturally replenished water resources, and expedites the investment in water-supply backstop technologies such as desalination. Then, we employ a detailed hydro-economic model of Israel's water economy to assess the validity of claims by scientists and bureaucrats that lobbying by the local agricultural sector has contributed to the depletion of the country's natural freshwater resources and thus accelerated the development of seawater desalination. Specifically, we compare observed trajectories of water-management policies in the years 2000–2020 to their simulated counterparts, and find a better fit for simulated scenarios that involve lobbying than for a socially optimal one; this result prevails under simulated conditions of extreme water shortage due to faster population growth or lower recharge of natural water sources. The best-fitted political-equilibrium scenarios indicate considerable deadweight loss. We discuss potential causes of over- and undervaluation of the lobbying effect.
Slater, Y. ; Finkelshtain, I. ; Reznik, A. ; Kan, I. Large-Scale Desalination and the External Impact on Irrigation-Water Salinity: Economic Analysis for the Case of Israel. Water Resources Research 2020, 56, e2019WR025657. Publisher's VersionAbstract
Abstract Recent agroeconomic studies in water-scarce countries such as Spain, Australia, Saudi Arabia, and Israel have revealed the economic viability of irrigating high-value crops with desalinated water. However, the worldwide growth of large-scale desalination capacities is primarily designed to resolve urban-water scarcity, disregarding the impact of desalination on irrigation-water salinity. We develop a dynamic hydroeconomic programming model where infrastructure capacities and allocations of water quantities and salinities in a regional water distribution network are endogenous. We show that subsidizing desalination is socially warranted because the associated reduction in irrigation-water salinity is an external effect of water consumption by all water users. Empirical application to the entire state of Israel indicates that large-scale desalination of seawater and treated wastewater for irrigation is optimal. This result stems from the large share of irrigation-intensive salinity-sensitive high-value crops, motivated by Israel's policies to support local agriculture. Ignoring salinity results in a 45% reduction in desalinated irrigation water, a 29% reduction in farming profits, a 250% increase in water suppliers' profits, and an average deadweight loss of \$1,200 a year per hectare of arable land.
Finkelshtain, I. ; Kan, I. ; Rapaport-Rom, M. Substitutability of Freshwater and Non-Freshwater Sources in Irrigation: an Econometric Analysis. American Journal of Agricultural Economics 2020, 102, 1105-1134. Publisher's VersionAbstract
Population growth is increasing the scarcity of freshwater for irrigation and accelerating its replacement with non-freshwater sources such as treated wastewater and brackish water. Although these substitutes may be less productive agronomically, their supply is usually more stable. We develop a structural econometric framework to assess the substitution between fresh- and non-fresh water as it is inferred from water-use decisions of farmers under increasing block-rate water pricing. We employ the model to village-level panel data from Israel, in which 50% of the freshwater allotments were replaced during the 1990–2010 period by treated-wastewater quotas, using a non-freshwater/freshwater volumetric exchange rate of 1.2. Based on our estimation results, the hypothesis that the marginal rate of substitution between the two water sources is equal to one cannot be rejected. Simulations suggest that the Israeli quota-exchange policy has increased both agricultural production value and farming profits.
Bar-Nahum, Z. ; Finkelshtain, I. ; Ihle, R. ; Rubin, O. D. Effects of violent political conflict on the supply, demand and fragmentation of fresh food markets. 2020, 12, 503 - 515. Publisher's VersionAbstract
Violent political conflict has been documented to have comprehensive adverse effects on economic activity and, thus, substantially harm social welfare. As conflict escalations are often reported to fragment economic space, we suggest an empirical framework which allows for estimating changes in the size of markets often split by frontlines. This approach uses a differentiated goods oligopoly model to separate effects of conflict intensity on consumer demand, costs of trade, market size, and market structure. We combine daily sales of apples in Hebron - one of the focal points of the Israeli–Palestinian conflict - and variables quantifying complementary aspects of conflict intensity. Conflict is found to suppress demand and affect competition more significantly than it increases costs of trading. Simulations indicate a 15% reduction in total daily consumption during conflict of high intensity while a pacification would yield a 20% welfare gain. This empirical framework allows disentangling the effects of conflict on food markets. The results suggest that relief policies should consider alleviating effects of fragmentation of economic space, e.g., by ensuring humanitarian corridors.
Fishman, A. ; Finkelshtain, I. ; Simhon, A. ; Yacouel, N. Collective brands. International Journal of Industrial Organization 2018, 59, 316 - 339. Publisher's VersionAbstract
We analyze the effect of a shared brand name, such as geographically designated agricultural brands, on incentives of otherwise autonomous firms of the same type to establish a collective reputation for product quality. When firms of the same type share the same brand name, consumers have more observations of past quality and are able to predict quality with greater precision than if brands are private. This effect increases firms’ incentive to invest in quality. On the other hand, a shared brand name may motivate free riding on the group’s reputation, reducing incentives to invest. We identify conditions under which the former effect is dominant and leads to higher quality than stand alone firms can achieve.
Reznik, A. ; Feinerman, E. ; Finkelshtain, I. ; Fisher, F. ; Huber-Lee, A. ; Joyce, B. ; Kan, I. Economic implications of agricultural reuse of treated wastewater in Israel: A statewide long-term perspective. Ecological Economics 2017, 135, 222 - 233. Publisher's VersionAbstract
We develop an Israeli version of the Multi-Year Water Allocation System (MYWAS) mathematical programming model to conduct statewide, long-term analyses of three topics associated with agricultural reuse of wastewater. We find that: (1) enabling agricultural irrigation with treated wastewater significantly reduces the optimal capacity levels of seawater and brackish-water desalination over the simulated 3-decade period, and increases Israel's welfare by 3.3 billion USD in terms of present values; (2) a policy requiring desalination of treated wastewater pre-agricultural reuse, as a method to prevent long-run damage to the soil and groundwater, reduces welfare by 2.7 billion USD; hence, such a policy is warranted only if the avoided damages exceed this welfare loss; (3) desalination of treated wastewater in order to increase freshwater availability for agricultural irrigation is not optimal, since the costs overwhelm the generated agricultural benefits. We also find the results associated with these three topics to be sensitive to the natural recharge of Israel's freshwater aquifers, and to the rate at which domestic-water demand evolves due to population and income growth.
Reznik, A. ; Feinerman, E. ; Finkelshtain, I. ; Kan, I. ; Fisher, F. ; Huber-Lee, A. ; Joyce, B. The Cost of Covering Costs: A Nationwide Model for Water Pricing. Water Economics and Policy 2016, 02, 1650024. Publisher's VersionAbstract
This study offers a high-resolution model of nationwide water supply. The model is sufficiently detailed to represent all main water sources in an economy, the principal segments of the conveyance system, urban, industrial and agricultural demand regions, and various water types, including fresh, saline and recycled. Calibrated for Israeli 2010 data, we find that the optimal extraction of fresh water is only 2% larger than the total observed supply from those sources. However, for some specific sources, the deviation between optimal and observed quantities is significant. Assuming average constant recharge, the optimal aggregated desalination is 57% of the 2010 desalination capacity and only 33% of the present desalination capacity. Even with an assumed 40% decline in recharge (for example, due to climate change), the model uses only 50% of the present desalination capacity. This may suggest that the construction of desalination facilities in Israel, which began in 2005, could have been delayed. The model establishes a comprehensive system of pumping levies and user fees that support the optimal allocation. However, due to considerable scale economies, the average cost is almost 50% larger than the marginal cost. The implications are that the welfare cost of the recent Israeli Balanced Budget Water Economy legislation is more than 100 million USD per year, about 10% of the water economy share of the GDP.