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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.
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Chapter 5: Economic Instruments for Water Management in the Presence of Positive Externalities: The Case of Rice-based Irrigation in Sri Lanka

Marielle Montginoul and Daniel Renault


Marielle Montginoul and Daniel Renault 5.1 INTRODUCTION Natural renewable resources are traditionally treated as open-access goods as long as their exploitation remains compatible with their natural replenishment. However, cases of overexploitation leading to the ‘tragedy of the commons’ as illustrated by Hardin (1968) have increasingly been reported throughout the world. Such cases include inland and sea waters fisheries, forests or pastures, aquifers and rivers, and the atmosphere seen as a pollution natural absorber. In response to appearing crises, the use of economic instruments relying on market mechanisms has increasingly been advocated to regulate the allocation of natural resources. A growing number of researchers and policy makers suggest that the establishment of a system of well-defined and tradable rights, defining the access to the natural resource, represents a solution in regulating the access to natural resources for a wide range of crises. A frequently quoted example is the system of transferable rights to pollute that has been established to regulate atmospheric pollution in the USA. The fishing industry is also regulated by such a system of tradable rights in several countries (Young, 1999). Similarly, many experiences of water markets have already been conducted during the last decade, both in the developed world (USA and Australia) and in developing countries (Chile and Mexico).1 In the case of water management, the implementation of such marketbased allocation mechanisms consists in three major steps: (a) the definition of the rights that define the access to the resource; (b) their initial...

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