Water supply and consumption uncertainty: a conflict-equilibrium

This paper addresses the economic efficiency of water production and distribution in a vertical supply chain consisting of a water-provider and a consumer (municipality). The inherent conflicts over stocks and supply costs that emerge among the parties in the water supply chain are modeled as a zero-sum stochastic differential game. Consequently, the effects of collaboration and competition are contrasted as well as the application of block pricing and subsidies in overcoming potential conflicts between the water-provider and the municipality subject to political risks of not meeting demands for water. The effect of uncertainty is elaborated as well. In particular, we show that when the supply variance depends on the mean supply, the effect of uncertainty depends on the intensity of the conflict between the municipality and the water-provider.