New Horizons in Environmental Economics series
Chapter 2: Investigating Water ‘Scarcity’
INTRODUCTION Scarcity is a relative concept. In physical terms, scarcity means that there is less of a resource or a commodity. Scarcity is relevant for policy only when it has welfare implications, for example, when an increase in the availability of a resource or commodity would result in increased well-being. Thus, rather than considering scarcity to be good or bad, the normative considerations should be based on the consequences of scarcity and how scarcity aﬀects other important values such as eﬃciency, equity or sustainability. For example, it is possible to suggest that if a certain resource is scarce, it must be used more eﬃciently. Various tools of economic analysis such as cost–beneﬁt analysis are employed when policy makers need to compare two or more alternative means of achieving policy goals to choose the most eﬃcient way of meeting the goals. In conducting such cost–beneﬁt analysis, the concept of ‘scarcity rent’ is used. This is the surplus that a water user gains after taking into account all other costs including normal return on capital (CIE, 2004). Thus, the imputed scarcity rent of water is used to value the beneﬁts of improved access to water. However, such an approach is not easy to implement and in the case of a commodity such as water which is essential for sustaining life, the potential for conﬂict between water for drinking purposes versus water for productive purposes is quite obvious. This chapter will focus mainly...
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