Cost–Benefit Analysis and Water Resources Management

Cost–Benefit Analysis and Water Resources Management

Edited by Roy Brouwer and David Pearce

How are the economic values of water and water quality accounted for in policy and project appraisal? This important book gives an overview of the state-of-the-art in Cost–Benefit Analysis (CBA) in water resources management throughout Europe and North America, along with an examination of current applications.

Chapter 3: Water as an Economic Good

J. Briscoe

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

Extract

J. Briscoe 1. THE THEORY OF WATER AS AN ECONOMIC GOOD There is an emerging consensus that effective water resources management includes the management of water as an economic resource. The Dublin Statement of the International Conference on Water and the Environment, for example, states that ‘water has an economic value in all its competing uses and should be recognized as an economic good’. But there is little agreement on what this actually means, either in theory or in practice. This chapter provides a simple framework for unbundling the different components of water as an economic resource, provides some data on critical variables and discusses the policy implications. The idea of ‘water as an economic good’ is simple. Like any other good, water has a value to users, who are willing to pay for it. Like any other good, consumers will use water so long as the benefits from use of an additional cubic meter exceed the costs so incurred. This is illustrated graphically in Figure 3.1(a), which shows that the optimal consumption is X*. Figure 3.1(b) shows that if a consumer is charged a price P1 which is different from the marginal cost of supply, then the consumer will not consume X*, but X1. The increase in costs (the area under the cost curve) exceeds the increase in benefits (the area under the benefit curve) and there is a corresponding loss of net benefits called the ‘deadweight loss’. But what...

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