Incorporating Uncertainty in the Economic Evaluation of Capital Investments for Water Use Efficiency Improvements

Abstract

Long run investments in water-use efficiency are risky, particularly where water is required as a secure input. State of nature representations of supply outcomes provide an increased understanding of the vulnerability of capital, and water users, to adverse events. Using Californian data, we couple cost–benefit analysis to a state contingent analysis approach to explore the riskiness of water-use efficiency investment payoffs and cash-flow outcomes when frequencies of states of nature change over the investment course. Critically, this allows us to represent decision-maker adaptation in the face of risk and uncertainty, and the role that subsidy policy plays in those decisions.