Edited by Ariel Dinar and Kurt Schwabe
Chapter 16: Nonmarket valuation and water resource management
Almost all water projects have a monetary cost and produce a vector of outputs. Benefit–cost analysis requires that all of these outputs be measured in monetary terms. It is hoped that most of these outputs, like reduction of flood risk, are desirable; but undesirable outcomes, like loss of habitat, can also occur. Some of these outputs, such as electricity, are readily valued in monetary terms by using their market price. Others, like supplying irrigation water, can refer to contractual prices or estimate their influence on profits by taking account of their marginal value in the production process. Still others, like recreational fishing and preservation of an endangered species, are not bought and sold in the marketplace and need to be valued using nonmarket valuation techniques (Champ et al., 2003; Freeman et al., 2014). This chapter looks at the use of these techniques in the context of water projects. The notion of measuring and comparing the benefits and costs of a water project appears to have been first formalized in the 1902 US River and Harbor Act, which required a board of engineers to consider project benefits and costs. This Act distinguished between local/special and national/general benefits for the purpose of local cost sharing.1 The US Flood Control Act of 1936 formalizes the need for a benefit–cost assessment with its requirement that a project’s ‘benefits to whomsoever they may accrue must exceed the costs’.
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