Pricing and Water Resource Allocation Scheme for the South-to-North Water Diversion Project in China

The eastern route of the South-to-North Water Diversion (SNWD-ER) project is a massive-scale interbasin system to transfer water from the Yangtze River to North China. With the infrastructure construction close to completion, the project is now faced with many complicated operations management problem at different levels. The problems are unique in that, on the one hand, the project is expected to be financially self-sustainable by charging water usages, and on the other hand, the water price is regulated for its nature as a social product. One such problem is to achieve a rational water allocation among different users by appropriate pricing schemes. In this paper, we study how to use a two-tier pricing scheme to balance the water allocation by using a Stackelberg game model. From the study, we find that (1) the Stackelberg game always has equilibrium solutions to balance the benefit of every party in the system, which implies that the two-tier pricing scheme can effectively coordinate the water allocation; (2) the two-tier pricing scheme can also result in multiple desirable by-products such as encouraging the implementation of water saving mechanism and giving the local water users certain priority; and (3) the government can adjust the pricing parameters to control and balance the profit of every party. As such we conclude that the two-tier pricing scheme is an effective way that integrates both the government control and market powers to ensure the public interest and the economic benefit, which is suitable for SNWD-ER project.