Marginal value of natural water in agriculture: a study in the suburbs of Mekelle City, Ethiopia

In areas where markets for natural water are lacking, information on its marginal value can be an important tool for proper pricing to achieve efficient allocation of the resource. This article investigates the marginal value of natural water (rainwater used as a proxy) in agricultural crop production in the suburbs of Mekelle City, Ethiopia, by econometrically estimating individual value functions for three selected crops: wheat, barley, and teff (a staple food crop in Ethiopia). Results show that, on average, an additional 0.30 birr (birr = Ethiopian currency: 1 euro approximate to 23 birr) worth of output is generated for each extra cubic meter of rainwater used. This result provides the marginal value (shadow price) of water in crop production at a certain point of the water cycle. It thus provides useful policy information for efficiently pricing water resources based on full-cost recovery, implying that the current tap water prices should be increased at least by 0.30 birr/m(3) if the scarcity value of natural water is to be accounted for. The marginal value of natural water turned out to be the highest in teff production, suggesting that producing this crop would be the most water-efficient decision in the area.