The Economics of Water Management in Developing Countries

The Economics of Water Management in Developing Countries

Problems, Principles and Policies

Edited by Phoebe Koundouri, Panos Pashardes, Timothy M. Swanson and Anastasios Xepapadeas

The increasing scarcity of water resources (in terms of quantity and quality) is one of the most pervasive natural resource allocation issues facing development planners throughout the world. This problem is especially prevalent in less developed countries where the management of this valuable resource has become a critical policy concern. This authoritative new volume outlines the fundamental principles and difficulties that characterise this challenging task. The authors begin by detailing the significant problems of water management which are specific to developing countries. In particular, they highlight the political economy of water management in the context of both pricing and institutional reform.

Chapter 7: Contrasting Different Methodologies to Deriving Natural Resource Scarcity Rents: Some Results from Cyprus

Phoebe Koundouri

Subjects: economics and finance, environmental economics, environment, environmental economics, environmental sociology, management natural resources, water

Extract

7. Contrasting different methodologies to deriving natural resource scarcity rents: Some results from Cyprus Phoebe Koundouri* 7.1 INTRODUCTION TO BACKGROUND RESEARCH Efficient pricing of a resource incorporates marginal cost of extraction and scarcity rents. Since groundwater resources exhibit natural supply constraints, scarcity rents must be imposed on current users. Due to the absence of clear groundwater ownership rights, extracting behaviour is myopic and extracting agents are willing to pay only the private cost of their groundwater extraction. As a result, scarcity value goes unrecognized and as such is difficult to estimate. This results in inefficient pricing and misallocation of the resource, and calls for intervention in the relevant resource market. The main aim of this chapter is to compare and contrast results from two alternative methodologies that allow indirect estimation of shadow groundwater scarcity rents and derive inference on the potential for managing this resource. Empirical analyses are based on economic and hydrological data collected for the region of Kiti in the island of Cyprus, representative of coastal semi-arid regions. The background research on which this chapter is based can be found in Koundouri (2000) and a number of relevant papers. These papers are briefly introduced in this section in order to facilitate the reader’s understanding. In Koundouri (forthcoming) we critically assess previous theoretical and empirical attempts to calculate welfare gains from implementing efficient groundwater pricing and examine the potential for groundwater management. This potential is seriously challenged by Gisser-Sánchez’s Effect (GSE)...

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