Impact of water resources pricing mechanism on global agricultural economy based on CGE model Open Access

If countries do not take corresponding measures, the limited water supply and the decline of water quality would lead to serious water shortage (Li et al. 2020; Liu et al. 2023; Yuan et al. 2023). Because of the change in water resource allocation, the reserves of high-quality water resources (WR) would be greatly reduced (Liu et al. 2020a, 2020b; Zhu et al. 2022).

The pricing mechanism of WR can provide programmatic support for the sustainable development of society. D'Odorico (2020) proposed a biophysical framework with concise data. He conducted a high-resolution global assessment of the value of irrigation water as a function of crop type and geographical location to determine the value of water production in irrigation agriculture and highlight its global space-time model. It can determine the value of water production in irrigated agriculture. It realized the reasonable allocation of WR price by determining the value of irrigation and highlighted its global space-time model. Li & Hui (2018) studied the current situation of WR to highlight its role in solving the problems of flood and water shortage, improving the management of WR in inland plains and supporting the sustainable development of the country. Zhou (2020) discussed the relationship between product market competition and enterprise water information disclosure, and how the type of enterprise ownership affects the water resource management of Chinese enterprises. This can provide new insights for enterprise water resources management (WRM). Bijl (2018) studied the future competition between irrigation and other water use through detailed comprehensive models of economic and hydrological processes. Local allocation rules had a great impact on water shortage, while the basin-level strategy restricting irrigation has a small effect. Bhave (2018) developed an iterative decision-making method under uncertainty. It included scenario generation, joint production with stakeholders and water resource modeling, and exploring the robustness of adaptation options and approaches to future climate and socio-economic uncertainties. The purpose is to study the specific impact of climate and environment on WR. Jain (2019) discussed the availability, variability and increasing water intake and also proposed remedial measures to meet the challenges. Keyhanpour et al. (2021) investigated the simulation of sustainable WRM. The studies have described the impact of WR pricing mechanism on the economy but had not combined with Computable General Equilibrium (CGE) model.

CGE model is widely used in water resource impact. Tian et al. (2021) simulated and calculated the optimal tax rate of WR, proving the effectiveness of this model in formulating WR tax rate. Shahpari (2022) believed that policies and applicable legislation should be formulated to improve the use of water supply. He formulated effective methods to save WR, especially in the agricultural sector that consumes the most important part of water. Because the water consumption in the agricultural sector was large, the water price would also affect the development of agricultural economy (AE). Peng (2020) has built a computable general equilibrium model of the water diversion project in the water receiving area, which was for rational allocation of water diversion and local WR. He adjusted the industrial structure and improved WRM according to local conditions. He adjusted the industrial structure according to local conditions and improved water resource management. It provided a theoretical basis for the reform of water market and water price management. Li et al. (2022) built a coupling relationship model between WR and high-quality economic development and evaluated the coupling coordination between the two. The studies have described the significance of CGE model for WR mechanism, but there are still some deficiencies in agricultural economic development.

In order to study the impact of WR pricing mechanism on AE, this paper analyzed the specific implementation impact of WR pricing mechanism through CGE model. By analyzing the upper limit of water resource pricing, this paper found that a reasonable water resource country can effectively promote agricultural production and development, thus promoting the development of AE. Compared with other research results, this paper mainly used CGE model to study the pricing mechanism of WR to analyze the relationship between AE and pricing mechanism.

The first is the lack of a reasonable water price formation mechanism. The scarcity of local WR and the requirements for operating conditions and environmental protection are rarely considered when determining and implementing water prices. The decline in water prices has led to a huge gap between prices and costs, which has hindered the development of WRM. Because the water demand would increase after the water price falls. To fully ensure that the price lever plays a full regulatory role in the allocation of WR, water prices should fully reflect the value and scarcity of WR. However, this can only be achieved through project costs. The unreasonable pricing system plays a role in the reverse regulation of WR allocation to a certain extent.

The second is the lack of perfect operation mechanism (Li et al. 2021). Most regions continue to adopt a single water price standard, that is, a unified water price for the same purpose, season and period, and there is no difference between water quality and guaranteed supply, and there is no scientific pricing method (Islam 2018).

Third, the power of water price regulation is insufficient. The water price of water-saving projects is determined by the government. The government formulates the water price policy of the water supply department, manages the water price of the water supply department and ignores the role of market law in determining the water price. The supply and demand of water is constantly changing. Although the water supply unit has a certain discretion in the water price, it has not actively adjusted the water price.

The first is the impact of economic development. The gradual commercialization of natural resources such as water not only reduces the transaction cost of resources but also ensures the sustainable use of WR by automatically adjusting the market price mechanism. WR trade must have a solid market foundation, and fair water price is the basis and key of WR trade. Because the higher the transparency of water prices, the greater the public investment in agriculture.

The second is the impact of industrial development. Water price is the link between water management and other economic sectors. They can reasonably allocate the benefits of WRM and promote water conservation. It improves water efficiency and ensures effective allocation of WR across departments and regions.

The third is the effect of rational allocation of WR. Under the guidance of the principles of fair and sustainable utilization, the rational allocation of WR must be effective. With the continuous improvement of market economy, the share of market mechanism in the allocation of WR has gradually increased. Its purpose is to determine the water price more reasonably to protect the effective allocation and sustainable use of WR. The improvement of agricultural water use efficiency can release enough water for urban use (Florke et al. 2018).

The fourth is the impact of sustainable development. The effective utilization, allocation and benefit of resources depend on the reasonable water price. This plays an important role in optimizing, protecting and saving water.

The reasonable pricing model of WR in CGE mainly follows the following rules: the first is fairness. The price of water should be determined by the ability of everyone to pay for water and the affordability of water users. The principle of fair pricing emphasizes reducing absolute poverty and meeting basic needs, but also takes into account social issues related to water prices. These problems would also affect the distribution of social income. Because the allocation and pricing of WR would affect the water consumption and output of each department. The second is efficiency. If WR can be used in the whole market to ensure effective distribution, then market distribution is realized by price, profit and ownership. Price is an indispensable component, which means that water can be effectively distributed among different users only when the water price truly reflects the economic production cost. In order to ensure sustainable water use, it is necessary to find a distribution mechanism to transfer the limited WR to the most effective place.

Y is the actual income of water pricing, V is the water consumption under the pricing mechanism and O is the water supply cost and profit of WR.

To create a CGE model for WR, four main methods must be used to integrate elements related to WR into the CGE model. The first concerns production and consumption restrictions related to the use of WR. As a limitation of production and consumption, the macroeconomic impact of water supply change is usually simulated by water volume change, which has the advantage of being easy to use, but water price is not directly included in the market mechanism in the model. The second problem involves production factors. The fact that water can be included in the CGE model as a production factor means that it is a method of most current policy models. The production function structure includes the basic elements of capital, labor and water.

On the one hand, the level of industrial water demand at different stages of economic development can be clearly assessed. On the other hand, people can analyze the impact of external changes on industrial exports and WR. The third problem involves taking water as the intermediate input of the CGE model as the production unit, which is mainly used to analyze the impact of decision-making on WRM. The purpose is to make decisions in combination with influencing factors when pricing WR. The fourth problem is to design different types of inputs for distinguishing and producing CGE models. This is a comprehensive treatment of water supply and demand issues related to global agricultural production with water structure as an element and intermediate input, which describes the price elasticity property of CGE functional irrigation input.

The first is that it is impossible to consider the difference in water resource prices. Because of agricultural water subsidies, the price of agricultural water is lower than that of non-agricultural water, but this situation is rarely included in the model. The water price of agricultural and non-agricultural sectors is homogenized, or the CGE model is directly used to calculate the actual water price difference of each sector, but it is not enough to analyze the impact on the economy. The investigation of the relationship between water price and economic growth is an important part of the sustainable development of ecological environment and social economy (Liu et al. 2020a, 2020b).

The second is that the difference in water demand cannot be considered. The agricultural sector and non-agricultural sector adopt the same or similar production function structure. The price elasticity of water demand in non-agricultural sectors is generally higher because it does not explain the difference in the price elasticity of water demand in different sectors. Therefore, when the water price policy increases the water price, the price elasticity of water demand in non-agricultural sectors is relatively high, which can reduce or increase the amount of water recycled to save water but may have less impact on the rise of agricultural water price. As water prices rise, agricultural output would decline, but water demand would decrease.

The third is to give less consideration to WRM. Decentralized management leads to different water supply and pricing mechanisms in different departments. Agricultural irrigation water is generally provided by local governments but includes circulating water and tap water, which are generally used for production and water supply in non-agricultural sectors.

The fourth is the lack of agricultural segmentation and expansion. The extent of expansion can be insufficient according to the supply and demand of WR in different planting sectors and regions.

The fifth is the lack of recognition of WR pricing mechanism. In many sectors, there is a close relationship between natural resources and production, and production and consumption would also have an impact on the environment (Arslan 2022).

The water price mechanism has defects and is undergoing reform. Agriculture is facing increasing demand and water shortage. Therefore, the existing and reformed water pricing mechanism would lead to differences in the distribution efficiency of agricultural water and non-agricultural water.

The first is to establish a reasonable water price mechanism. The water price structure should reflect the general opportunity cost of water supply, based on the water supply operation cost including water supply and wastewater treatment. The water price should also include reasonable profits. In this way, the water resource company can not only pay the cost but also ensure the proper reproduction of the water resource company. The pricing of WR should fully consider the factors (such as water supply capacity, user demand, user purchasing power and other factors related to water price and agricultural sector) that affect the water price in order to promote the development of WR, protect the interests of users and achieve the expected social benefits. It should establish a democratic consultation system, formulate and adjust water prices and improve the transparency of water prices. The basin and urban water use committee should conduct democratic consultations with the government and water companies to improve the transparency of water prices.

The second is to build a scientific water price system. Water price should reflect the role of factors such as the cost of aquatic products, water supply and demand. The price and price difference of different types of water should be reasonable. Different water prices should be set for different water supply projects, and a reasonable price comparison should be made between fresh water and renewable WR. In addition to the reasonable price of aquatic products, people should also confirm whether the exchange price of aquatic products is reasonable.

The third is to introduce a flexible pricing mechanism. The purpose of national water price regulation is to ensure fair and open market competition, maintain normal water price order and effectively allocate WR through the national price mechanism. In addition, based on the comprehensive analysis of the actual ownership and supply of WR in different regions, an effective pricing system and a coordinated management and pricing plan should be formulated. It should clarify water rights and establish a water rights exchange system based on the principle of market economy. It should form a water rights pricing mechanism with national macro-control, commercial market operation and user participation.

In the context of urbanization, the reform of irrigation subsidies in the price of agricultural products would make the single water price lower than the primary irrigation price but higher than the water price. This would not only provide more WR for the agricultural sector to support agricultural production but also help to reduce the water demand of industry, construction and service industries. The difference in water price among different price mechanisms is the main reason for the difference in WR allocation. Because the price of water for different departments and different uses would vary under different mechanisms. The reform of the agricultural product price transfer irrigation subsidy system has little impact on rural income growth. Rural income is the main source of income, that is, capital income, agricultural workers’ wages, irrigation and rainwater irrigation land income (Wu et al. 2022).

In addition, the growth of all these incomes is lower than the existing mechanism, which would also lead to relatively low consumption growth of the rural population. Under the new mechanism, the rural population cannot benefit from the higher income and consumption level brought by urbanization. Therefore, considering the limited growth of the income and consumption of the rural population, it is necessary to provide subsidies in the short term to gradually promote the adjustment of water prices.

Under the influence of market mechanisms, the price of subsidized irrigation water would rise due to insufficient supply, and the increase in demand for agricultural work in plantations would increase the wages of agricultural workers, thus raising the price of agricultural products. This limits the consumption of agricultural products by rural residents in different regions. On the other hand, the water price mechanism can ensure that the water supply is basically not affected by drought, and it can provide more tap water for urban residents and the vast majority of rural residents. Transferring irrigation subsidies with the price of agricultural products allows all residents to benefit from the fall in the price of agricultural products while ensuring that agriculture fully benefits rural residents, so as to obtain the full price of agricultural products. Increasing the import of products and promoting the use of water-saving plant planting and water-saving irrigation technology can avoid new restrictions on agricultural production and reduce the problems of water supply and local product shortage in the agricultural sector.

The production factors in the production chain actually reduce the price of agricultural products and limit the income growth of farmers. Because many farmers find their agricultural income too low, they choose to work in cities and give up large areas of land. Consumer subsidies can enable farmers to fully benefit from agricultural products. This can encourage them to improve production technology and plant better agricultural products to create more agricultural economic benefits. They can expand the agricultural product processing sector, levy production taxes on the agricultural product processing industry and offset the existing subsidies. In fact, the production of high-quality and value-added agricultural products by farmers can reduce the sensitivity of agricultural production to input price factors. In particular, urban residents hope to improve their quality of life by increasing their income. They are not sensitive to the consumption price of high-value-added and high-quality agricultural products. Therefore, the transfer of subsidies from agricultural production chain to agricultural consumption chain is a process of improving producer price elasticity and reducing consumer price elasticity, which would promote agricultural production and increase farmers’ income.

In order to study the effect of WR pricing mechanism on agricultural economic development, this paper analyzes the gray weight of WR pricing through CGE model to study the impact of WR pricing on AE and agricultural sector prices. Finally, this paper compares the economic benefits of agriculture and the rationality of WR allocation under the WR pricing mechanism. For this reason, this paper first investigates the satisfaction of the government, residents and water supply departments in a certain area with the implementation of WR pricing mechanism. Each group investigated 50 people, and the specific results are shown in Table 1.

According to the data described in Table 1, the three groups are relatively satisfied with the implementation of WR pricing mechanism. Among the satisfied groups, there are 42 government personnel, accounting for 34.7% of the group. There are 38 residents, accounting for 31.4% of this group. There are 41 people in the water supply sector, accounting for 33.9% of this group. Among the general group, there are five government personnel, accounting for 33.3% of the group. There are six residents, accounting for 40% of this group. There are four people in the water supply sector, accounting for 26.7% of this group. Among the dissatisfied groups, there are three government personnel, accounting for 21.4% of the group. There are six residents, accounting for 42.9% of this group. There are five people in the water supply sector, accounting for 35.7% of this group.

On the whole, the satisfied group accounted for 80.7% of the total number of respondents. The average group accounts for 10% of the total number of respondents. The dissatisfied group accounted for 9.3% of the total number of respondents. The satisfied group believed that the implementation of WR pricing mechanism would standardize the use of WR, improve agricultural output through rational allocation and promote the development of AE. Dissatisfied groups believe that the water price of some industries would rise sharply after the implementation of the water resource pricing mechanism, which can increase production costs to a certain extent, leading to a decline in water consumption.

Figure 5(a) shows the traditional pricing mechanism, and Figure 5(b) shows the new pricing mechanism, and the gray weight under the new pricing mechanism is always higher than the traditional pricing mechanism. According to Figure 5(a), the gray weight of water supply company 1 under the traditional pricing mechanism is 1.16. The gray weight of water supply company 2 is 1.28, and that of water supply company 3 is 1.39. The gray weight of water supply company 4 is 1.59. According to Figure 5(b), the gray weight of water supply company 1 under the new pricing mechanism is 1.46, and that of water supply company 2 is 1.49. The gray weight of water supply company 3 is 1.55, and that of water supply company 4 is 1.85. Through comparison, it can be seen that under the new pricing mechanism, the gray weight of water supply company 1 is 0.3 higher than the traditional one. The gray weight of water supply company 2 is 0.21 higher than the traditional one; The gray weight of water supply company 3 is 0.16 higher than the traditional one. The gray weight of water supply company 4 is 0.26 higher than the traditional one. In general, the gray weight of the new pricing mechanism is 0.23 higher than that of the traditional model. This is mainly because the new water resource pricing model can effectively allocate resources, and price according to different uses, and make reasonable use under the condition of limiting water demand.

Figure 6(a) shows the impact of rising water prices on agricultural sector prices, and Figure 6(b) shows the impact of rising water prices on agricultural sector output. It can be seen from Figure 6(a) and 6(b) that while the water price is rising, the agricultural sector price is rising. The output of the agricultural sector is declining. When the water price is 0.5, the price of the agricultural sector increases by 0.1%, and the output of the agricultural sector decreases by 0.4%. When the water price is 1, the agricultural sector price rises to 0.3%, and the agricultural sector output decreases by 0.5%. When the water price is 1.5, the agricultural sector price increases to 0.5%, and the agricultural sector output decreases by 0.7%. When the water price is 2.0, the agricultural sector price rises to 0.6%, and the agricultural sector output decreases by 0.8%. When the water price is 2.5, the agricultural sector price rises to 0.8%, and the agricultural sector output decreases by 0.9%. When the water price is 3.0, the agricultural sector price rises to 1.5%, and the agricultural sector output decreases by 0.9%. During the whole process, water prices rose by 2.5% and agricultural sector prices rose by 1.4%. The output of the agricultural sector fell by 0.5%. It can be seen from the above results that the agricultural sector price would rise after the water price rises. This is mainly because the increase in water price can effectively promote agriculture to save WR and can also change the economic structure of agriculture. The decline in the output of the agricultural sector is due to the increase in the cost of agricultural production after the rise in water prices, and the decline in the output of crops. This can reduce the demand for labor force to a certain extent, leading to a decline in farmers’ income and a corresponding reduction in water consumption.

Figure 7(a) shows the traditional pricing mechanism and Figure 7(b) shows the new pricing mechanism, and the agricultural economic benefits and resource allocation effect under the new pricing mechanism are better than the traditional pricing mechanism. According to Figure 7(a), under the traditional pricing mechanism, the agricultural economic benefit of Company 1 is 75%, and the resource allocation effect is 61%. The agricultural economic benefit of Company 2 is 77%, and the resource allocation effect is 66%. The agricultural economic benefit of Company 3 is 76%, and the resource allocation effect is 64%. The agricultural economic benefit of Company 4 is 78%, and the resource allocation effect is 68%. According to Figure 7(b), the agricultural economic benefit of Company 1 under the new pricing mechanism is 84%, and the resource allocation effect is 81%. The agricultural economic benefit of Company 2 is 85%, and the resource allocation effect is 80%. The agricultural economic benefit of Company 3 is 88%, and the resource allocation effect is 82%. The agricultural economic benefit of Company 4 is 87%, and the resource allocation effect is 79%. On the whole, the average agricultural economic benefit of the company under the traditional pricing mechanism is 76.5%, and the average resource allocation effect is 64.8%. Under the new pricing mechanism, the average agricultural economic benefit of the company is 86%, and the average resource allocation effect is 80.5%. Through comparison, people can see that the agricultural economic effect under the new pricing mechanism is 9.5% higher than the traditional model, and the resource allocation effect is 15.7% higher than the traditional model.

Through comparative analysis of experiments, it can be seen that the pricing mechanism of WR under the CGE model optimizes the rationality of water prices in different regions and uses. According to the unified division of different regions and uses, it can effectively realize the rational allocation of resources and also improve the agricultural economic benefits and promote the development of AE. In addition, the pricing mechanism of WR can also help residents reduce water demand to save water costs. This can improve the daily income of residents, protect the output of agriculture and keep the output within a reasonable range.

The reform of WR pricing mechanism is a negotiation process among farmers, relevant governments and various stakeholders in the water supply sector. The pricing should be negotiated according to the actual ownership and supply of WR in different regions, so as to achieve a unified and effective regulatory pricing. Although in some areas, each department is required to manage WR separately due to different circumstances, water prices can only be managed by the public sector. Considering the actual cost of water supply, in the extreme case of water supply reduction, it promotes water conservation through market mechanism. By eliminating irrigation subsidies and partially subsidizing rural income and consumption losses, a water price mechanism can be established to protect agricultural production and economic development. In addition, reasonable pricing is the basis for rational allocation of WR, which is conducive to protecting and improving the agricultural production environment, promoting the sustainable development of AE and sustainable utilization of resources.

No funding was used to support this study.

All relevant data are included in the paper or its Supplementary Information.

The authors declare there is no conflict.