New approaches in water resource economics

In many parts of the world, changing demand and supply patterns are contributing to an increasing physical scarcity and competition for water resources. Historically, new demands have been met by developing additional supplies—with the incremental cost of water remaining relatively constant over time due to the ready availability of water development project sites to meet growing demands. As the water economy moves from an expansionary to a mature phase, incremental costs are sharply rising, and interdependencies among users and uses are greatly increasing. With this move, the issues to be addressed by water economists tend to become more pressing, broader and more complex. While in the expansionary phase structural or engineering approaches to water management tend to be the main focus, in a maturing water economy nonstructural or institutional options for solving water problems receive increasing attention. In particular, resource allocation and valuation issues move to the forefront of economic inquiry.

This poses special challenges in the water sector. In contrast to other resources, the use of water for one purpose at a given time and location does not necessarily preclude its use elsewhere, at a later time, for the same or another purpose. In the mature phase however, increasing interdependencies can lead to pervasive externalities and—without public policies—to outcomes for society that will be less than optimal. A further complicating issue is that water for the most part is a good not traded on regular markets. The economic assessment of resource allocation options therefore requires the development and application of valuation methods to generate synthetic estimates or shadow prices for water in its different uses. With a changing climate, further challenges arise due to the increasing variability and uncertainty of water supplies in terms of time, space, and quality. This increases the need for investments and policy changes in the water sector and beyond, particularly toward coping with water scarcity and reallocating water between users and uses, including for water-dependent ecosystems, and an economic assessment of the associated benefits and costs.

In an effort to bring together water economists and development practitioners to focus on some of these pressing issues in the water sector, the 11th Annual Meeting of the International Water Resource Economics Consortium (IWREC) was hosted by the World Bank in Washington, DC on September 7–9, 2014. IWREC has served as a platform for water economists worldwide to promote economic work on water resources and exchange information and research findings since the early 1990s. The 11th Annual Meeting, held under the theme “Efficiency and Water Conservation: Methodologies and Case Studies” included 50 presentations in 12 sessions, and may have been the largest gathering of water economists to-date. Financial support was provided through the Water Partnership Program (WPP), a multi donor trust fund at the World Bank. Five selected contributions to the meeting that incorporate interesting new approaches for assessing investments and policy changes in times of increasing water scarcity, together with an introduction and outline, have now been published as a special issue of Water Resources and Economics (Volume 13, 2016). Two additional special issues with articles from the meeting will be published in Water Economics and Policy later this year.

The five contributions use innovative ways for addressing the increasing complexity of policy analysis as the water economy matures, the interdependencies among users and uses increases, and climate change poses additional challenges. They show that to ensure efficient but also fair outcomes of investment and/or policy interventions, it may be necessary to pay particular attention to aspects that so far have not been much considered and/or quantified, such as:

1. The different preferences of the users of water supply systems (Price et al.)
2. The various dimensions that may impact the optimal capacity of water projects (Xie and Zilberman)
3. The location of interventions in a basin to minimize negative externalities on downstream uses (Bekchanov et al.)
4. The importance of freshwater water allocation regimes not only for inland but also coastal areas (Kennedy and Barbier)
5. The possibility of cooperation among key water users to enhance private and public benefits and internalize environmental damages (Kahil et al.)

The contributions also illustrate how incorporating insights from other disciplines such as hydrology, engineering, agronomy, biology, ecology, psychology and sociology into economic analyses of water management issues in times of increasing scarcity allows for richer and more realistic assessments.

Related Links:

Water Resources and Economics, Volume 13 (2016) - Contributions to the International Water Resource Economics Consortium 11th Annual Meeting – Guest edited by Susanne M. Scheierling

Water Blog: Why Water Presents Special Challenges: A Brief Rationale for Water Resource Economics

12^th Annual Meeting of the International Water Resource Economics Consortium (IWREC), September 11-13, 2016, World Bank, Washington, DC