Front Cover
 Table of Contents

Group Title: Economics report - University of Florida Food and Resource Economics Dept. ; 97
Title: Constant percent rule in intra-sectoral water allocation
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Permanent Link: http://ufdc.ufl.edu/UF00027704/00001
 Material Information
Title: Constant percent rule in intra-sectoral water allocation
Series Title: Economics report - University of Florida Food and Resource Economics Dept. ; 97
Physical Description: Book
Language: English
Creator: Lynne, Gary D.
Kiker, Clyde F.
Publisher: University of Florida Agricultural Experiment Station
Publication Date: 1980
 Record Information
Bibliographic ID: UF00027704
Volume ID: VID00001
Source Institution: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: oclc - 21028365

Table of Contents
    Front Cover
        Page i
        Page ii
        Page iii
    Table of Contents
        Page iv
        Page v
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        Page 16
Full Text


Alternative water allocation rules can have differential effects on
the distribution and level of economic benefits from water use. An
"economic efficiency rule" (EER) is compared with the "constant percent
rule" (CPR), the latter having been used in Florida. Aggregate water de-
mand curves are shown for commercial water users in Dade County, Florida.
Total benefit losses from a required overall reduced use of 15 percent
may be greater with the CPR. Implementing the EER, through raising prices,
resulted in benefit gains to 3 of the 4 groups considered. Also, the
motel-hotel group gained the most from the EER, in both a relative and an
absolute sense.


Water has historically been allocated in the United States among com-
peting uses and users primarily via the mechanism of a non-market insti-
tution. In Florida, we currently have water management districts charged
with insuring water management in the public interest. These evolving
institutions are charged with serving a resource allocation role, a role
served by markets for many other products and resources in the United
This paper uses a "best guess" total water demand curve relationship
in addition to empirical estimates from an earlier study on commercial
water demand in Dade County, Florida. These data are used to illustrate
the major issues that evolve in the application of "economic efficiency
rules" (which tend to evolve naturally in market allocation) with a par-
ticular rule that has already been used by Florida water districts, called
the "constant percent rule." Use of this "best guess" curve implies the
final overall price shown for fixed percentage reductions in water could
be incorrect. Also, it then follows, the absolute dollar-estimates of
benefits from using the EER over the CPR could be inaccurate. The reader
is cautioned, then, to devote attention toward the directions of change
and to note concepts being presented. Absolute estimates of overall
price and benefit impacts from water shortage or reductions cannot be
accomplished until overall demand relationships are available in the

Gary D. Lynne
Clyde F. Kiker



INTRODUCTION. . . . . .. .. .. .... 1

What is the Constant Percent Rule? . . . .. 1

Limited Knowledge of Aggregate Demand. . . . 2

Commercial Water Demand. .. . . . . 3

Impacts of Using the CPR Rule. . . .... ... 6

Greater Efficiency with the EER .. .. ....... ... 8

Implications for Equity. . . . . .. 10

Can the EER be Practically Applied? Some Speculative
Discussion. . . . .. .. . 10

Costs of Using the EER Within the Current Institutional
Setting . . . ..... . ........ 11

Summary and Implications . . . . 12

REFERENCES. . . . . . . .. 15



1 Hypothetical aggregate water demand by commercial,
industrial, residential, and agricultural water users,
Miami SMSA, 1972 . . . . .

2 Estimated annual water demand for individual business
groups, Miami SMSA, 1972 . . . .

3 Estimated annual, aggregate water demand for selected
commercial business establishments, Miami SMSA, 1972..







1 Economic efficiency and distributive impacts of constant
percent allocation rule, Miami SMSA (hypothetical data
on total water use for area). . . .. ....



Gary D. Lynne and Clyde F. Kiker


Water management districts in Florida are charged with the difficult
task of allocating water among competing uses and users. This is no par-
ticular problem when there is sufficient water to satisfy all demands.
During water short periods (or when shortages are expected in the future),
however, the Governing Boards of the water districts must specify rules
for allocating water (See [2]). Alternative rules, or criterion, can have
differential effects on economic efficiency and equity, as will be demon-
strated herein.
It is the purpose of this report to demonstrate the use of water re-
source demand curves and analyses in evaluating two types of water alloca-
tion rules. In particular, we examine the economic efficiency and equity
impacts of using the "constant percent rule" and compare these effects
with those from the "economic efficiency rule." Empirical estimates are
based in part on earlier studies of the factors affecting water demand.
In particular, a study on commercial water demand and use in Dade County,
Florida [9] is used extensively herein.

What is the Constant Percent Rule?

Both the South Florida and the Southwest Florida Water Management
Districts have utilized what is referred to herein as the "Constant Per-

GARY D. LYNNE and CLYDE F. KIKER are Associate Professors, Food and
Resource Economics Department, Institute of Food and Agricultural Sciences,
University of Florida, Gainesville, Florida.

cent Rule" (CPR) in reducing water use in water short situations. Under
the CPR, users are requested to cut use by some fixed percentage, such as
15 percent in the case of the Southwest District in 1975 [12]. It is
shown in this report that such an allocation rule may not be economically ef
ficient. This does not mean the CPR is not desirable on other grounds.
However, the impacts on economic efficiency brought about by the use of
the CPR may have to be understood to satisfy social goals and concerns.
To improve understanding of these concepts, we compare the application of
the CPR rule with an "Economic Efficiency Rule" (EER). Under this rule,
water is allocated among competing uses and users during water short per-
iods to maximize economic efficiency. The variant results of applying
the CPR and the EER are developed in the remainder of this report.

Limited Knowledge of Aggregate Demand

The nature of the aggregate demand relationship must be known to
fully evaluate the differences between the CPR and EER rules. Unfor-
tunately, only limited information is available on the parameters of the
aggregate demand for water in Florida. For the purpose of this report,
we have formulated, using information available, an aggregate demand
curve for Dade County, Florida. This demand curve is illustrated in
Figure 1. Less water is used as water prices are increased. Also, tastes
and preferences of consumers, household and producer technology, and in-
come affect the quantity of water used, but are held constant at every
point on the curve.
Using the aggregate curve and an assumed average price of $0.80 (see
Figure 1), the water demand is 73,344 million gallons per year (mgy).
This quantity corresponds closely to the actual total water used in the
county in 1970 [8]. The actual average price of the water at this quan-
tity level is not known from the 1970 data, but the Andrews [13] and
Luppold [11] survey results place it in the vicinity of $0.50 to $0.90.
Thus, the hypothetical aggregate demand curve appears to be representative
of the type of relationship expected for the area.
It was further assumed in the development of this aggregate demand,

Aggregate water
demand, all uses

Million gallons per year

Hypothetical aggregate water demand by commercial, industrial,
residential, and agricultural water users, Miami SMSA.








Figure 1.

that the elasticity of demand in the water price range of $0.60 to $1.00,
was 0.5 to 0.8. In particular, demand was assumed to have an elasticity
of 0.6 for a water price of $0.80 per thousand gallons. This assumption
is consistent with findings of other research. Lynne and Gibbs [7] show
residential demand in the Hiami area to be elastic for all values above
$0.54 per thousand gallons. It was shown in [6] that for at least one
agricultural crop (limes) the demand was inelastic for pricesless than
about $1.10 per thousand gallons. Most commercial demands are also in-
elastic for the above price ranges [9]. Other researchers have found
similar elasticities [3,4].
Demand curves are normally expected to slope downward to the right
and be "upward concave." This expected condition was supported by findings
of Andrews [1], Luppold [11], and Williams [15]. The general equation
form W = e(a-br) (where W = water and r = price of water per unit) was
used to generate the curve in Figure 1.

Commercial Water Demand

Commercial water demand curves representing each of four major types
of establishments in Dade County are illustrated in Figure 2. These esti-
mates were developed in an earlier study [9]. The total commercial demand,
from these four types, is illustrated in Figure 3. Again, quantity de-
manded is shown to decrease for increases in price. The reasons for the
general shape of these demand curves is discussed in [9]. All the demand
relationships in Figures 2 and 3 are inelastic over nearly the entire
price range illustrated [9, pp. 7-16].

1The economic jargon "elasticity of demand" is simply a way of de-
scribing how responsive a producer or consumer is to a change in price.
For example, if the elasticity is 0.6, this simply means a 1 percent in-
crease in price will lead to a 0.6 percent decrease in quantity pur-
chased. If the elasticity is greater than 1, a 1 percent increase in
price will lead to a more than 1 percent decrease in quantity purchased,
Demand is said to be "elastic" if the elasticity is greater than 1 and
"inelastic" if the elasticity is less than 1. The reader is advised to
consult any basic economics text for further exemplification.









Hotels and



o 2.40

S 1.60


0 400 800 1200 1600 0 2000 4000

Million gallons per year

Estimated annual water demand for individual business
groups, Miami SMSA, 1972.

Million gallons per year

Figure 3.--Estimated annual, aggre-
gate water demand for
selected commercial busi-
ness establishments,
Miami SMSA, 1972.

stores /

Eating and
drinking estab-

2-- Department
I stores

Figure 2.

Impacts of Using the CPR Rule

Consider a situation where a water management district wishes to re-
duce the use of water in Dade County by 15 percent over the long run.
Assume each commercial user was currently purchasing water at $0.80 per
thousand gallons, at the margin. The economic impact on each of these
major commercial types from the CPR is illustrated in Figures 2 and 3, and
number magnitudes are presented in Table 1.
Starting at $0.80 per thousand, a 15 percent reduction in water use
by each type of user causes quantity reductions varying from 16.2 mgy for
department stores to 227.2 mgy for the eating and drinking establishments
group [Table 1]. The motels-hotels group, for example, is forced to re-
duce use from about 1,365 mgy to less than 1,160 mgy [Figure 2]. The
economic loss associated with the motel-hotel group is also substantial,
represented by $309.7 thousand dollars [Table 1), the "hatched area"
under the motel-hotel curve in Figure 2. The overall reduction in bene-
fits associated with the commercial group is $621.8 thousand [Table 1] as
shown by the hatched area under the aggregate commercial demand curve in
Figure 3.
While the required reduction of 15 percent by each group is "equit-
able" in some physical sense, it is not equal in the relative losses of
economic benefits from no longer having the use of that much water. The
share of the total loss in economic benefits associated with the commer-
cial sector varies from $14.1 thousand (2.3 percent of the total loss) for
department stores to $309.7 thousand (49.8 percent) for the motel-hotel
group [Table 1]. It becomes necessary for the appropriate decision bodies

The "long run" is relevant here as the commercial demand curves used
in this report are long run in nature. The "long run" is a period of time
sufficient in length for users to change the nature of water using appli-
ances (adopt different technology). (See [9]).

This is a measure of the social loss, representing the sum of the
loss incurred by the particular type business establishment plus the loss
to the water companies incurred as a result of now selling ;less water.
It is a social loss in total benefits.

Table 1.--Economic efficiency and distributive impacts of constant percent allocation rule, Miami SMSA (hypothetical
data on total water use for area).
r __ ^ ______ ____





Percent Million Thousands Percent Percent Million Thousands Percent Thousands
gallons of dollars gallons of dollars of dollars

15.0 16.2 14.1 2.3 21.0 22.6 20.5 11.1 -6.3

15.0 58.6 53.3 8.6 14.6 57.2 51.9 28.2 1.4

15.0 205.2 309.7 49.8 2.4 33.1 29.5 16.0 280.2

15.0 227.2 244.6 39.3 6.0 90.4 82.3 44.7 162.3


621.8 100.00

a~ a percentage of

aAs a percentage of water use prior to "shortage" period.

Benefit reduction as a percentage of the total reduction


184.2 100.0


occurring for the four types of commercial establishments.

CChange in benefit reduction from using economic efficiency rule as compared to the constant percent rule. A positive (negative)
sign indicates that particular group gained (lost) from application of the efficiency rule as compared to the constant percent rule.


(e.g., the Governing Boards of the water management districts) to ascertain
whether large differences among groups, in social benefit changes are in-
deed equitable. A different distribution of the social benefits will oc-
cur if the EER rule is applied.

Greater Efficiency with the EER

The EER could be implemented by allowing the mechanism of price
(cause price to rise) to bring about the ultimate goal of an overall 15
percent reduction in water use. This strategy would allow that some
groups of users would ultimately cut use by more than 15 percent and some
by less, due to the elasticity of their demand. As is shown in the fol-
lowing, the commercial sector'(under the EER) would ultimately cut their
use by only 6 percent, implying some other groups (maybe agricultural
and/or residential users) would complete the difference.
Realization of a 15 percent total cutback in use would necessitate a
rise in price to $1.02/thousand [Figure 1]. (The reader is reminded this
is a hypothetical figure, representing the price from the curve in Figure
1). Total use in Dade County (hypothetical) would be cut from 74,344 mgy
to 63,211 ngy.
The general movement toward the $1.02 price is as follows. As price
starts to rise from the current $0.80 level, commercial users will reduce
water use (as evidenced by the shape of the demand curves in Figures 2
and 3). Other user groups (eg., residential and industrial) will also
be cutting back use in response to price changes (or being required to
cut back in certain ways, other than a flat 15 percent). As the price
continues to rise, less and less water is used until eventually, the "mar-

It should also be noted that even under the CPR strategy, the im-
plicit price resulting from a 15 percent total cut back is still $1.02,
even if the price mechanism is not allowed to function. That is, aggre-
gate demand curves of the general nature shown in Figure 1 exist whether
a market is actually functioning or not.

ket equilibrium" price of $1.02 is achieved.
Using this $1.02 price, the total reduction in benefits associated
with the commercial sector is now $184.2 thousand [Table 1]. This loss
is represented by the shaded area in Figure 3( the sum of the shaded areas
in Figure 2). While still substantial, this result represents a $437.5
gain in social benefits, due to economic efficiency gains, for commercial
users over the allocation under the CPR [Table 1, $621.8 less $184.2 =
The differential affects among the various groups are also substan-
tially different under the EER, as compared to the CPR. First, the over-
all reduction required of the commercial sector is only 6 percent, as com-
pared to 15 percent, under the CPR. Secondly, the department store group
will now have to reduce use by 21 percent, while motels-hotels now cut
use by 2.4 percent, with 14.6 and 6.0 percent reductions for the groceries
and eating-drinking establishments respectively. The resulting dollar
changes are quite large. The department store group now has a benefit
reduction of $20.5 thousand as compared to $14.1 thousand under the con-
stant percent rule [Table 1]. The motel-hotel group benefited greatly
under the EER, now having to sacrifice $29.5 thousand as compared to
$309.7 thousand under the CPR.
As noted earlier, shifts and changes would occur among and between
other groups not explicitly considered (eg., other commercial establish-
ments, residential users, industrial, and agricultural users) in this
exampleupon application of the EER. Some groups would gain and others
would lose with this rule, as compared to the CPR. The motels-hotels
group, for example, accounted for 49.8 percent of the total benefit re-
duction in the commercial group under the CPR, while they accounted for
only 16.0 percent under the EER. Not only did they gain over $280.2
thousand, they also gained in a relative sense (as their share declined
from 49.8 to 16.0 percent). In fact, the motels-hotels groups gained

It must be understood that the $1.02 value is a gross (not a net)
measure of marginal benefits. It was assumed the marginal water costs
would be equal across all uses to simplify the presentation. Thus, the
EER rule is served by equating the net marginal benefit values across all
uses (or the gross marginal values if the marginal water costs are all

relative to all the other groups shown in Table 3.

Implications for E'uity

It becomes apparent from the foregoing that economic efficiency rules
may not help a decision body in resolving equity problems resulting from
particular allocation decisions. The two allocation approaches illustra-
ted in Table 1 give rise to substantial differences in the overall ef-
ficiency levels attained and the distribution of the losses among the
various groups. But, this is likely to be true for all alternative types
of allocation systems compared. It is also the case that application of
the economic efficiency rule (EER) will always give the largest "benefit
pie" (or in the example, the smallest loss of benefits) of any other
criterion used to allocate water. Thus, it is possible the EER can
satisfy both efficiency and equity goals: some other means for allocating
the losses (or benefits) could be used after the EER is applied. For
example, this could take the form of taxation of the gains and income
transfer to the losers.

Can the EER be Practically
Applied? Some Speculative Discussion

Florida water is currently not allocated through a market system
where price serves to balance quantities demanded with supplies. If a
market could be established (and we have argued elsewhere at least some
features of the market place could be introduced; see [5]), then price
could guide the allocation process and the result would be greater econ-
omic benefits. If the resulting distribution of the water entitlements
and the water's benefit streams (the "pieces of the benefit pie" and
their allocation) was not socially desirable, various taxation-income
transfer schemes could be used to meet equity goals. The possibility for

6This assumes the costs of implementing the EER will be no greater
than the cost of using other allocation rules.

introducing markets into Florida water allocation should not be dismissed
as undesirable or impractical. Further research is needed into the fea-
sibility of using a market approach, possibly in consort with various
regulatory actions.
Even if we choose in Florida to never develop a market for water,
the EER could still be used. A water district could allocate water as if
there were a market. That is, a water district could allocate water so
that the (net) market value in water use among all uses is equal, as per
the EER. In a competitive market situation, this criterion is automat-
ically met by the offsetting supply and demand with prices serving as in-
dicators of relative marginal costs and marginal benefits. In the current
water situation in Florida, this criterion could be satisfied by water
districts comparing the marginal costs of water supply with the marginal
benefits of water use to the various user groups, and allocation through
the vehicle of water permits. Market transactions by individuals result
in the exchange of water use entitlements. Assigning water permits to
users is equivalent in that the entitlement to use water is transferred
from society at large to some individual user, for some period of time.
Thus assigning water use entitlements through a permit system is effec-
tively the same as assigning rights through sale and purchase.7

Costs of Using the EER Within the
Current Institutional Setting

As noted earlier, the market type of water resource allocation insti-
tution has not been used in Florida. This last section of the paper is
devoted to a brief discussion of the types of costs associated with imple-
menting the EER when such a non-market institution is used.
A major cost would be for the development of necessary information
on water value. The only way economic efficiency can be assured without
a functioning market is if there is knowledge of the (net) marginal value

Depending upon the equity criterion used by water districts and the
relative costs of implementation, equity and efficiency effects could vary
substantially, however.

productivities (net marginal benefits) associated with uses and users in
the area. Finding all these demand curves (eg., those in Figures 1-3)
could be very costly. This does not make use of efficiency rules impos-
sible, however. Even some general notions of (net) marginal value pro-
ductivities may be sufficient to improve the economic efficiency level
in water use.
A second major cost would be the administrative, monitoring, and
regulatory costs involved for insuring that every use category and user
utilized water at the level where the "net" marginal value in each use
is exactly equal. This may not be strictly possible, but an approxima-
tion may be practical. Metering systems could be used to monitor use,
and at least broad based decisions regarding allocation among major types
of user groups (commercial, agricultural, industrial, residential, natural
systems) could be made using the EER.
Both types of costs (for information and administration-monitoring-
regulation) must be subtracted before efficiency gains from using the
EER could be claimed for society. It is possible, of course, that the
efficiency gains from the EER would not be sufficient to justify rejec-
tion of the CPR rule. This becomes an empirical question, of consider-
able import to those concerned with water management in Florida.

Summary and Implications

Both the South Florida and the Southwest Florida Water Management
Districts have utilized what is referred to in this report as the "con-
stant percent rule" (CPR). That is, faced with water shortage condi-
tions, all users are asked to cut withdrawals by some constant percen-
tage. The economic efficiency impacts of this rule are highlighted in
light of the "economic efficiency rule" (EER). A hypothetical aggregate
demand curve for the entire Dade County is used to illustrate overall

8The problem of information cited here is similar to that faced by
any centrally planned economy where markets are non-existence or severely
constrained. In a properly functioning market, of course, information
flows are automatically transmitted via the feedback signals on the
price for the commodity in question.

impacts. The measures of affects on the commercial sector are based on
empirical estimates. It is shown that the CPR, while serving equity
goals in the sense that everyone is cut the same percentage, is not equal
in the sense of benefit reductions. It is also shown in an example case
that four commercial groups would lose $184.2 thousand under the EER as
compared to $621.8 thousand under the CPR, a net gain to the commercial
group of $437.5 thousand from the use of the EER. The commercial sector
would also reduce quantity purchases by only 6 percent under the EER as
compared to 15 percent under the CPR rule.
The use of EER rules may not help a decision body in resolving
equity problems resulting from particular allocation decisions. The two
allocation approaches illustrated in this report give rise to substantial
differences in distribution of the losses among various groups. But this
.is always true for all alternative types of allocation systems compared.
In our judgement, decision bodies should have knowledge of these differ-
ential impacts.
Information and administrative-monitoring-regulatory costs must be
known if alternative types of water allocation systems are to be compared.
A major cost of the EER is for information, especially if a market is not
used to allocate water. Distribution is also assuredly different under
the two systems.
Some implications and conclusions from the discussion and analysis
in this report are as follows:
1. there are differential efficiency and distribution effects be-
tween the CPR and the EER. As a result, water managers may
have to evaluate the level and incidence of these effects in
order to meet desired social goals regarding efficiency and
2. further "water resource demand analyses" are needed if it is
deemed desirable to further evaluate and compare the various
water allocation rules possible for use in Florida;
3. the EER will generally yield more direct economic benefits than
the CPR to all those affected, in total, as long as demand curves
have a negative slope. However, the relative efficiency gains of
different allocation rules can only be compared after due consid-


eration for the administrative, monitoring, and regulatory costs
of the alternative institutional devices for allocation.
The overriding consideration flowing from this report is that alter-
native water allocation rules will have differential effects on equity
and economic efficiency in the use and allocation of Florida water. It
may be in the public interest to devote more resources to determining
specifically the nature of these effects.


[1] Andrews, D. "An Estimation of Residential Demand for Water in Dade
County, Florida." MS Thesis, University of Florida, 1974.

[2] Carriker, Roy R. and Gary D. Lynne. The Florida Water Resources
Act of 1972: A Synopsis. IFAS Water Resources Council Fact Sheet
WRC-9. Gainesville: University of Florida, 1979.

[3] Chiogioji, M. H. and E. N. Chiogioji. Evaluation of the Use of
Water Pricing as a Tool for Conserving Water. WRRC Report No. 2.
Washington: Water Resources Research Center, Washington Technical
Institute, November, 1973.

[4] Howe, C. W. and F. P. Linaweaver, Jr. "The Impact of Price on
Residential Water Demand and its Relation to System Design and Price
Structure." Water Resources Research 3 (First Quarter, 1967), pp.

[5] Kiker, Clyde F. and Gary D. Lynne. "Water Allocation Under Admin-
istrative Regulation: Some Economic Considerations," So. J. of Ag.
Econ. 8 (December, 1976), pp. 57-63.

[6] Lynne, Gary D. "Water Price Responsiveness and Administrative
Regulation--The Florida Example," So. J. of Ag. Econ. 9 (July 1977),
pp. 137-143).

[7] Lynne, Gary D. and Kenneth Gibbs. Demand and Pricing Policy for
Residential Water. Food and Resource Econ. Dept. Econ. Report 83.
Gainesville: University of Florida, December, 1976.

[8] Lynne, Gary D. and Clyde F. Kiker. Water Use in South Florida--An
Economic Perspective. Food and Resource Economics Department Un-
published mimeo. Gainesville: University of Florida, 1977.

[9] Lynne, Gary D., William G. Luppold, and Clyde F. Kiker. Water De-
mand by Retail and Service Business Establishments, Dade and Monroe
Counties, Florida. University of Florida Agricultural Experiment
Station Technical Bulletin 800. Gainesville: December 1978.

[10] Lynne, Gary D., John H. Williams, and John E. Reynolds. Character-
istics and Costs of Vegetable Irrigation in Dade County, Florida.
Food and Res. Econ. Dept. Econ. Info. Rpt. 99,(Revised).
Gainesville: Univ. of Fla., October, 1978.

[11] Luppold, William G. "Commercial Demand for Water in Dade County,
Florida." MS Thesis, University of Florida, 1976.

[12] Southwest Florida Water Management District. Hydroscope 6 (May
1975), Brooksville, Florida.


[13] Storch, W. "Managing South Florida's Groundwater Aquifer," In
Depth Report, 1 (March 1972), Central and Southern Florida Flood
Control District, West Palm Beach, Florida, April, 1974.

[14] Storch, W. "Water Management During Drought Events." In Depth
Report, 2 (April 1974), Central and Southern Florida Flood Control
District, West Palm Beach, Florida, April, 1974.

[15] Williams, John H. "An Estimation of the Agricultural Demand for
Water in Dade County." MS Thesis, University of Florida, 1976.

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