Dynamic marginal cost curves to support water resources management

Area of Science:

• Environmental Policy and Management
• Environmental Economics
• System Dynamics Modeling

Background:

• Conventional marginal cost curves (MCCs) are widely used for cost-effectiveness analysis in environmental policy.
• Traditional MCCs face limitations including lack of transparency, failure to account for interaction effects, ancillary benefits/costs, and intertemporal dynamics.

Purpose of the Study:

• To present a novel approach for developing dynamic MCCs using system dynamics (SD).
• To address the documented limitations of conventional MCC methods in environmental policy assessment.
• To evaluate the application of this approach to water scarcity management in a Swedish city.

Main Methods:

• Development of a system dynamics (SD) based model to generate dynamic MCCs.
• Application of the SD-based model to a case study on water scarcity in a Swedish city.
• Integration of behavior-over-time graphs and causal-loop diagrams with dynamic MCCs.

Main Results:

• The proposed SD-based approach effectively overcomes the four key limitations of conventional MCCs.
• Dynamic MCCs provide a more comprehensive assessment of environmental policy options.
• The integration with graphical tools offers new policy insights and supports inclusive decision-making.

Conclusions:

• System dynamics modeling offers a robust framework for creating dynamic marginal cost curves.
• Dynamic MCCs enhance transparency, incorporate complexity, and consider intertemporal dynamics in policy analysis.
• This integrated approach fosters more informed and inclusive environmental policy and management decisions.