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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 6: A New Methodology for Measuring Groundwater Scarcity: Theory and Application

Phoebe Koundouri and Anastasios Xepapadeas


Phoebe Koundouri and Anastasios Xepapadeas* 6.1 INTRODUCTION The in situ shadow price1 of (unextracted) natural resources has been one of the key concepts in the theory of natural resource management (Koundouri, 2000; Koundouri, 2000a,b; Koundouri and Groom, 2003). This shadow price is a partial equilibrium price that estimates the individual user’s valuation of the marginal unit of the resource in situ. The value of having available a theoretically sound methodology for estimating the price of unextracted natural resources cannot be overemphasized if one wants to regulate the extraction of these resources and/or test the empirical relevance of the theory of exhaustible resources in explaining producers’ behaviour. The theory was not empirically tested until the second half of the twentieth century. The first major problem encountered in testing this theory was the non-observability of the in situ resource price. Relevant solutions offered in the literature amount to either work with the product price (for example, Barnett and Morse, 1963; Smith, 1979; Slade, 1982; Ahrens and Sharma, 1997), which may well be dominated by processing costs, or inferring the in situ price from an estimated equation (for example, Miller and Upton, 1985; Berck, 1988; Stollery, 1983; Farrow, 1985; Slade and Thille, 1997), which * We wish to thank the European Commission, DG XII, Cambridge Commonwealth Trust and Peterhouse of the University of Cambridge, for financial support and the Department of Statistics and Research of the Government of Cyprus for providing us with the data used in the empirical analysis of our...

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