Edited by Roy Brouwer and David Pearce
Chapter 2: Economic Criteria for Water Allocation and Valuation
R.A. Young 1. INTRODUCTION The water resource presents an unusually wide variety of public management issues of interest to economists. In its varied forms, water supplies important beneﬁts to humankind, both commodity beneﬁts (to households, industries and farms) and public environmental values, including recreation, ﬁsh and wildlife habitat and a medium for carrying material residuals (pollution) from human production and consumption activities. Moreover, as a resource whose supply is determined by natural forces, too much or too little water creates other public management problems (Young, 1996a). With growth in population and income, serious conﬂicts over allocations of water are found throughout the world, and in many areas are rapidly becoming worse (Gleick, 1998). Economic evaluation can play a role in public assessments of proposals for addressing water management problems. Resources have economic value or yield beneﬁts whenever users would willingly pay a price for them rather than do without, that is, whenever resources are scarce.1 Under certain conditions, market operation results in a set of values (prices) that serve to allocate resources and commodities in a manner consistent with the objectives of producers and consumers. In many parts of the world, the services provided by water have been plentiful enough that the resource could be regarded as a practically free good and, until recently, institutional arrangements for managing water scarcity in such locations have not been of serious concern. When markets are absent or do not operate eﬀectively (as are typical conditions in the case...
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