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This study developed an analytical framework and an empirical water sector model to evaluate current and alternative water allocation regimes in the Steelpoort sub-basin (SPSB) in terms of the key objectives of the national water act of South Africa. The analyses showed that bulk water is currently not only oversupplied to offstream uses in the SPSB at the expense of the ecological Reserve (instream benefits) but also underpriced. The water research levy, the only mechanism used for rent capture, recovers a negligible proportion of the water resource rent (RR) (less than 2% at best) implying that almost all RR dissipates to various offstream users in the form of indirect subsidies of about R0.42/m3 with the more realistic lowprice elasticity assumption. Commercial irrigation enjoys the highest subsidy being the major consumer followed by mining and hence the most to be affected by policy change in this regard. Results also indicate that the total maximum economic value offstream users are willing to pay for increasing water yields to supply the full requirement levels currently enjoyed at the SPSB is estimated at about R2.8/ m3. Although this value does not properly measure the net social gain or loss of environmental protection, it serves as a benchmark value against which per unit costs of potential alternative water supply options can be compared. A few caveats remain as key limitations of the study call for further research work. First, this study did not generate information on instream benefits to compare with offstream values lost as a result of protecting the ecological Reserve. Second, the study can benefit from improved specification of the water sector model parameters, particularly the supply side as better information will allow estimation of an upward sloping supply (marginal cost) curve. Key words: water value, resource rent and subsidies, water sector model, price elasticity of demand Water SA Vol.31(1) 2005: 9-16

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Water value, resource rent recovery and economic welfare cost of environmental protection: A water-sector model for the Steelpoort sub-basin in South Africa