Handbook of Water Economics
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Handbook of Water Economics

Edited by Ariel Dinar and Kurt Schwabe

Water scarcity, whether in the quality or quantity dimension, afflicts most countries. Decisions on water management and allocation over time, space, and among uses and users involve economic considerations. This Handbook assembles research that represents recent thinking and applications in water economics. The book chapters are written by leading scholars in the field who address issues related to its use, management, and value. The topics cover analytical methods, sectoral and intersectoral water issues, and issues associated with different sources of water.
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Chapter 9: Incentivizing interdependent resource management: watersheds, groundwater and coastal ecology

Kimberly Burnett, Sittidaj Pongkijvorasin, James Roumasset and Christopher A. Wada

Extract

Managing a single water resource typically requires an understanding of the linkages between key hydrologic factors and direct human influences (Qureshi et al., 2012). The problem is further complicated by the fact that water resources are often interdependent, which suggests that management should also account for ecological interlinkages. For example, a forested upstream watershed may replenish an underlying groundwater aquifer, or a coastal groundwater aquifer may provide positive spillover effects to a downstream nearshore resource, such as a fishery. Left unregulated, these spillover effects are economic externalities. In general, when private parties act in their selfinterest in the presence of externalities, the outcome is not socially optimal. Economic theory provides tools for aligning private incentives with the social optimum: taxes and payments. These tools can be applied directly to resource management problems, wherein the spillover effect is direct and transient (e.g. air pollution from oil and coal) or direct and dynamic (e.g. downstream sedimentation resulting from logging). The theory is less complete, however, when externalities are indirect, as they often are for water resources (e.g. the stock of coastal groundwater enhancing the stock of a nearshore aquatic species via submarine groundwater discharge). We therefore begin this chapter by extending the theory of externalities to include both static and dynamic indirect externalities and provide a taxonomy of externalities arising from resource use.

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