Published on The Water Blog

Why water presents special challenges: a brief rationale for water resource economics

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Photo: Christopher Walsh/World Bank Group

For the first time, the International Water Resource Economics Consortium (IWREC) held its annual meeting at The World Bank from September 7-9, 2014. The meeting, an annual gathering of water economists, serves as a place to exchange the latest information and research findings in the field.

Water presents special challenges for economic analysis, including measuring benefits and costs  and establishing appropriate institutional arrangements. To spark this year’s discussion, we shared with attendees and speakers text outlining the characteristics unique to water that make it a truly unusual resource.

The text is based on two publications, Water in the Universe by Arnold Hanslmeier (Springer, 2011) and Determining the Economic Value of Water by Robert A. Young (Resources for the Future, 2005). 

In addition to posting the conference presentations and recordings, we also wanted to share the text on these special challenges more broadly:

​Water is present almost ubiquitously throughout the universe.  Yet the Earth ​seems to be the only planet, at least in our solar system, where liquid water is found on the surface.  This presence of liquid water is thought to be a precondition for the evolution of life.

Water, in its liquid form, has many unique characteristics:  

  • Water is mobile. Water flows, evaporates, and seeps as it moves through the hydrologic cycle.  This makes it a “high-exclusion cost” resource, implying that the exclusive property rights which are the basis of a market economy are relatively difficult to establish and enforce.

  • Supply is highly variable. Basic raw water supplies are typically variable and unpredictable in time, space, and quality.  Global climate changes are raising concerns about longer-term supply trends. 

  • Water is a nearly universal solvent. Water provides an inexpensive capacity for absorbing wastes and pollutants, diluting them and transporting them to less adverse locations.  Its assimilative capacity should be understood as a scarce collective asset. 

  • Interdependency among users is pervasive. Water is rarely completely consumed in the course of its “use”.  Downstream users are affected by the quantity, quality and timing of these releases or return flows of upstream users.  The presence of these “externalities” implies that the full costs of economic activity are not recognized in individual decisions, making outcomes for society less than optimal. 

  • Water problems are often site-specific. Because of variations in water supply and local demand, problems with water resources are typically local, and policy often needs to be adapted to local conditions. 

  • Different benefits provided by water call for specialized management approaches. A distinction can be made between commodity benefits; waste assimilation benefits; public and private aesthetic, recreational, and fish and wildlife habitat values; biodiversity and ecosystem preservation; and social and cultural values. 

  • Water is mostly a low-valued commodity. The costs for transportation, lifting, and storage are usually high, relative to the economic value of water at the point of use.  Thus extensive water-conserving technologies (recycling, metering) as well as incentives for conservation (marketable property, increasing block pricing) are presently found only where water is recognized as scarce and valuable. 

  • Transaction costs tend to be high. The resources required for establishing, operating, and enforcing a resource allocation, management, or regulatory system are usually high relative to the value of the water.  Increased water scarcity and technological advances that reduce the transaction costs of monitoring and enforcing regulations encourage innovations in allocative institutions. 

  • Water is usually a “common pool” resource. This implies that a unit of water withdrawn by one individual is not fully available to other potential users, and that the costs of excluding potential unentitled users from exploiting the resource are relatively high.  Common pool dilemmas arise when resource use decisions that are rational from the individual’s perspective bring about a result that is not optimal from the perspective of the exploiters as a group, or of society. 

  • Many small decisions have a cumulative impact. While each individual act of water use may have a negligible impact, the sum total of many individual decisions can be of major importance—especially when markets or other mechanisms to ration resources are absent.  Effective public regulation of many small, scattered decision-makers is difficult and expensive, but increasingly necessary. 
For these physical, economic, social and political reasons, water presents special challenges for economic analysis, including with regard to measuring benefits and costs and establishing appropriate institutional arrangements.  Economists are called upon to answer these difficult questions.

Related link:
Feature Story: ​ The Role for Water Economists in Shaping Policy and Implementation


Susanne M. Scheierling

Senior Irrigation Water Economist

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