130
In this chapter, we address economic aspects of the Nexus and broader issues
regarding the analysis of the Nexus. We will cover the following:
1. Concerns about incorporating market reactions and prices.
2. Behavioral reactions of individuals given nexus actions.
3. Non-market valuation.
4. Welfare analysis.
5. The value of water in alternative uses.
6. Economic influences on observed nexus strategies.
7. The transfer of results between studies.
8. Induced innovation.
9. Adding consideration of limits.
10. Designing incentives.
In broader terms, we will cover externalities, income distribution and inequality
effects, dynamics, uncertainties and risk aversion, public–private roles, and cost–
benefit analysis. We will also use a case study as an example to illustrate economic
considerations concerning FEW Nexus metrics, data, and modeling which will be
explored in greater detail in Chaps. 13–16.
5.2 Economic Aspects of the Nexus
Here we discuss major economic issues when considering potential FEW Nexus
actions, which we will refer to as “projects.” Projects may refer to any type of activity designed and undertaken to achieve specific outcomes at the Nexus. In doing
this, we will both reveal theoretical concepts and ground them in practical FEW
Nexus domains to illustrate why consideration of these concepts is essential.
5.2.1 Incorporation of Demand and Supply Relations
A FEW project can both add extra supply to the market and alter input usage leading
to market price changes. In turn, such price changes can alter the revenue and cost
outcomes of the project. However, it is common for project evaluation to assume
prices of outputs, by-products, and inputs remain unchanged. Thus, price reactions
are essential considerations in Nexus project evaluation.
Bioenergy provides several illustrations of this effect. In 2005, the USA adopted
a Renewable Fuel Standard or “RFS” which requires the blending of renewable
biofuels into traditional hydrocarbon fuels. In practice, this primarily involves cornbased ethanol blended with gasoline and biodiesel blended with diesel. Over time
the volumes required to be blended have increased, and both the price of the ethanol
and the price of corn have increased exhibiting a response along the supply curve.
In fact, corn prices in 2011 were triple those in 2005 (note other forces contributed as discussed in Abbott et al. 2011). In 2017, corn prices were still more than
B. A. McCarl and Y. Yang
In this chapter, we address economic aspects of the Nexus and broader issues
regarding the analysis of the Nexus. We will cover the following:
1. Concerns about incorporating market reactions and prices.
2. Behavioral reactions of individuals given nexus actions.
3. Non-market valuation.
4. Welfare analysis.
5. The value of water in alternative uses.
6. Economic influences on observed nexus strategies.
7. The transfer of results between studies.
8. Induced innovation.
9. Adding consideration of limits.
10. Designing incentives.
In broader terms, we will cover externalities, income distribution and inequality
effects, dynamics, uncertainties and risk aversion, public–private roles, and cost–
benefit analysis. We will also use a case study as an example to illustrate economic
considerations concerning FEW Nexus metrics, data, and modeling which will be
explored in greater detail in Chaps. 13–16.
5.2 Economic Aspects of the Nexus
Here we discuss major economic issues when considering potential FEW Nexus
actions, which we will refer to as “projects.” Projects may refer to any type of activity designed and undertaken to achieve specific outcomes at the Nexus. In doing
this, we will both reveal theoretical concepts and ground them in practical FEW
Nexus domains to illustrate why consideration of these concepts is essential.
5.2.1 Incorporation of Demand and Supply Relations
A FEW project can both add extra supply to the market and alter input usage leading
to market price changes. In turn, such price changes can alter the revenue and cost
outcomes of the project. However, it is common for project evaluation to assume
prices of outputs, by-products, and inputs remain unchanged. Thus, price reactions
are essential considerations in Nexus project evaluation.
Bioenergy provides several illustrations of this effect. In 2005, the USA adopted
a Renewable Fuel Standard or “RFS” which requires the blending of renewable
biofuels into traditional hydrocarbon fuels. In practice, this primarily involves cornbased ethanol blended with gasoline and biodiesel blended with diesel. Over time
the volumes required to be blended have increased, and both the price of the ethanol
and the price of corn have increased exhibiting a response along the supply curve.
In fact, corn prices in 2011 were triple those in 2005 (note other forces contributed as discussed in Abbott et al. 2011). In 2017, corn prices were still more than
B. A. McCarl and Y. Yang