Handbook on the Economics of Natural Resources
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Handbook on the Economics of Natural Resources

Edited by Robert Halvorsen and David F. Layton

The topics discussed in the Handbook on the Economics of Natural Resources are essential for those looking to understand how best to use and conserve the resources that form the foundation for human well-being. These include nonrenewable resources, modeling of biological resources, conservation of biological resources and water resources. The expert contributors of this Handbook provide solutions to many of the problems that growing populations now face, and sketch the likely future developments in the field of natural resource economics whilst paving the way for new thinking.
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Chapter 17: Water quality and economics: willingness to pay, efficiency, cost-effectiveness, and new research frontiers

Yusuke Kuwayama and Sheila Olmstead


Economists have typically considered water quality issues to be within the domain of environmental economics and not in that of natural resource economics. However, there are several reasons why water quality can be thought of as a natural resource that, just like fossil fuels or fisheries, can be managed optimally over time and space. First, one of the important functions of water is its ability to dilute contaminants that are generated by economic activity and transport these contaminants to other locations. If water quality is not managed effectively, society will lose this service that is provided by its water resources. Second, water quality degradation can limit society’s capacity to benefit from the consumption of water. As a result, serious cases of water pollution can be equivalent to reductions in the stock of water available for uses such as drinking water and irrigation. Finally, there is the other direction in the link between water quality and quantity: that is, the impact of water consumption and withdrawals on water quality. For example, excessive withdrawals from a river can lead to increases in the concentration of contaminants in the river as well as increases in water temperature. For these reasons, the management of water quality often cannot be separated from the management of water quantity.

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