Edited by Roy Brouwer and David Pearce
Chapter 3: Water as an Economic Good
3. Water as an economic good J. Briscoe 1. THE THEORY OF WATER AS AN ECONOMIC GOOD There is an emerging consensus that eﬀective water resources management includes the management of water as an economic resource. The Dublin Statement of the International Conference on Water and the Environment, for example, states that ‘water has an economic value in all its competing uses and should be recognized as an economic good’. But there is little agreement on what this actually means, either in theory or in practice. This chapter provides a simple framework for unbundling the diﬀerent components of water as an economic resource, provides some data on critical variables and discusses the policy implications. The idea of ‘water as an economic good’ is simple. Like any other good, water has a value to users, who are willing to pay for it. Like any other good, consumers will use water so long as the beneﬁts from use of an additional cubic meter exceed the costs so incurred. This is illustrated graphically in Figure 3.1(a), which shows that the optimal consumption is X*. Figure 3.1(b) shows that if a consumer is charged a price P1 which is diﬀerent from the marginal cost of supply, then the consumer will not consume X*, but X1. The increase in costs (the area under the cost curve) exceeds the increase in beneﬁts (the area under the beneﬁt curve) and there is a corresponding loss of net beneﬁts...
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