Water Pricing and Economic Growth: Empirical Evidence from Water Network Supply Mode in China

The development of water network projects in China has facilitated the optimization of water resource allocation and improved utilization efficiency, aiding water-scarce regions in alleviating the supply–demand imbalance and promoting socio-economic development. However, the introduction of external water sources has also led to higher water supply costs and rising water prices, posing challenges for coordinating water resource security and economic growth in water receiving areas. Under the water network supply mode, the primary goal of water demand management in these areas is to balance the dual impacts of increasing water prices and the enhanced availability of water resources, while assessing the sustainability of economic growth. This study takes the Henan water receiving area of the Middle Route of the South-to-North Water Diversion Project as a typical case, developing a simultaneous equations model based on the environmental Kuznets curve (EKC) hypothesis to empirically analyze the nonlinear relationship between water prices and economic growth. The coefficients of the weighted average water price, along with its square and cube terms, are statistically significant and show an ‘N’-shaped curve in relation to overall economic growth. The relationship between industrial water price and industrial per capita GDP growth is currently located at the second upward phase of the ‘N’-shaped curve. Overall, economic growth in the water receiving area improves water price affordability, and the early implementation of industrial water price increases can drive structural transformation, promoting water-saving and efficient industrial water use. This study provides robust empirical evidence for water transfer decision-making and the optimization of the water pricing mechanism in water receiving areas.