Population growth and rising living standards, on the one hand, and changing climate, on the other hand, have exacerbated water scarcity worldwide. With increased scarcity, the tradeoffs inherent in allocating water to various competing uses have become ever more polarized. As a result, the policy challenge of managing water resources has become ever more crucial. These observations are unlikely to surprise anyone, certainly not those that bother to look at this book and follow the large and growing literature on the topic. So, what new does this book bring to the table? If we have to answer this question in a short phrase, it would be “Comprehensive Outlook Perspective” (COP, for short). Water emanates from various sources and serves different purposes. Within a water economy (a hydro-socio-economic system precisely defined in Chapter 2), water sources and uses are entwined together and affect each other in different ways. For example, groundwater contributes to stream flows, of which a share infiltrates and contributes to groundwater downstream. Or, water used for irrigation also provides environmental benefits associated with landscape and microclimate services of cultivated land. The implication of this characteristic feature is that water policies should be designed within a comprehensive framework encompassing the water economy as a whole.
The existing literature on the economics of water resources has predominantly focused on certain aspects or pieces of a water economy, e.g., water allocated to irrigation on the farm (or even field), region or state levels, or water allocation to urban and industrial users from ground and surface sources. Such partial approaches ignore the feedback effects between the piece under consideration and the other pieces of the water economy and are therefore limited in scope (which does not mean that they are not important). Water resources are regulated by various intervention policies, which characteristically aim at achieving multiple objectives, such as increased efficiency and improved water conservation, pollution control, income transfer, food security, environmental sustainability, and resource conservation. Such objectives require a comprehensive policy that accounts for the complex interactions between water sources and uses within a water economy. While it is perfectly legitimate for policymakers to focus their efforts on improved performance of water use in one sector, which may lead to an immediate improvement in that sector, still, broader implications may negatively affect other water sectors and indirectly also the particular sector in question.
The economic literature on impacts of policy interventions, such as pricing, quotas, water right assignments, and water trading schemes, has characteristically focused on subsets of a water economy, e.g., a group of users or a few sources. Policy interventions affect water users and sources directly (e.g., water regulations) or indirectly (e.g., trade, labor, or other input policies). Another typology of policy interventions could be the level at which they are applied, namely, as macro policies imposed on the state as a whole, or micro policies imposed on a region, a sector, or a group of individuals (e.g., farmers). Due to interactions between sectors and factors of production, the links between micro and macro policy interventions are often important and allow policymakers to better assess hidden and overlooked outcomes of their interventions.
Our combined, decades-long experience in various aspects of water economics has led us to believe that managing water resources requires a comprehensive approach that looks at a water economy as a whole and, in addition, relies on ecological and social considerations. This book has been written with this aim in mind for an audience consisting of academic readers as well as water managers and policymakers. To that end, we combined theoretical discussions with real-world issues associated with implementing various policies, emphasizing current and past examples from different (developing and developed) economies that highlight the important aspects of the economics of managing water resources under diverse circumstances.
Realizing the importance of an integrated approach in analyzing water resources, we elected to include in the book building blocks that consist of institutions, regulations, and infrastructure. We view water infrastructure, which includes conveyance systems, storage, wells, and treatment and desalination facilities, as a critical component in water management. Consequently, decisions regarding infrastructure construction, location, and timing of investment are essential in any water policy (Chapters 4 and 5). Some chapters are concerned also with the effectiveness of various policy regulations under different institutional setting (Chapters 3, 4, 8 and 9).
Recent years have witnessed increased globalization and climate change processes, both of which strongly suggest that water policies are no longer confined to a sector or a region but are in essence an economy-wide matter. Recognizing the importance of different policy-linkages and performance interactions under interdependencies of the water users (sectors, states) led us also to include a chapter on economy-wide considerations (Chapter 8), and a chapter on management of transboundary (internationally shared) water (Chapter 9).
While the main audience of this textbook is the upper-level undergraduate and graduate students from various academic disciplines with a solid background in economic principles and methods, the book targets also the group of water practitioners, who will benefit from the empirical aspects and the policy discussions in each chapter and from the case studies included in various chapters.
Chapter 1 (The State of Water Resources and the Need for a Comprehensive Perspective) presents historical trends of major variables, with a particular focus on spatial distribution of availability and demands for water across continents. The chapter describes the interaction between water resources and society over time in various parts of the world, the effects of climate change on the available water supplies, the technological means available to cope with water scarcity and deteriorated quality, the institutional and legal means experienced by various countries, and the types of decisions needed to implement and manage such means. As such, the chapter motivates the book’s content and the order of the chapters that follow.
Recognizing the multiplicity of water sources and user sectors and their interconnectedness (quantity and quality), we describe in Chapter 2 (The Water Economy) the water economy edifice, consisting of water sources, user sectors, the infrastructure connecting sources and users, and the sociological and legal rules and norms that restrict water allocation policies. This construct will serve as a basis for discussions and analyses throughout the book. This chapter describes the various pieces that constitute a water economy and how they are intertwined and affect each other. Understanding this system is, in our view, essential for water modelers and policymakers in selecting available policy interventions.
Chapter 3 (Supply Costs, Demands and Benefits) identifies the ingredients needed to evaluate water policies. This involves specifying costs and benefits associated with water allocation and the ensuing welfare indices needed to compare the performance of water policies, which is the subject of Chapter 4. This chapter provides the ingredients needed later in the book to compare various aspects of performance of the water policies under various conditions. It is worth stressing that benefits include not only those directly realized by consumers but also indirect benefits associated with external effects such as ecosystem services.
Chapter 4 (Optimal Water Policy) characterizes the optimal water policy, i.e., the feasible policy that generates the highest social welfare/payoff. The optimal policy involves water allocations from different sources to different sectors/users and the investments in water infrastructure needed to carry out these allocations. The optimal policy begins with a construction stage (which is typically short), followed by a turnpike stage that (eventually) converges to a steady state. The construction stage ends when the water economy’s infrastructure (i.e., the capital stocks required to pump, divert, filter, and convey water from sources to users) reach their respective (well-defined) turnpike levels. The turnpike capital stocks can be conceived as the stocks under the (hypothetical) situation in which capital can be freely rented at the market rental rate (interest rate plus depreciation rate). Under mild (smoothness) conditions, these turnpike capital stocks can be driven by feasible investment processes. Under some conditions, the turnpike policy converges to a steady state, at which water allocations, capital stocks, and investment rates remain constant over time. This feature is useful when transactions and implementation costs limit the ability to update policies too often, in which case the optimal steady state policy can guide short- and medium-run policies (away from the steady state) and its use can be justified as second best.
Chapter 5 (Water Regulation) introduces the economic rationale for centralized water regulations such as pricing. The chapter reviews the features of various water pricing methods, formulates the optimal pricing scheme, and demonstrates the roles of shadow prices and cost recovery. Also addressed is the allocation of the joint cost of the infrastructure needed to extract, divert, produce (recycled, desalinated water), and convey water from each source to each sector. Special attention is given to the allocation and pricing of environmental water, i.e., water that supports ecosystem services. A distinction is made between conveyed and instream environmental water. Conveyed environmental water is water allocated and conveyed to an environmental site, e.g., to restore a polluted stream flow or an estuary. Instream water refers to natural water that could be diverted/pumped/extracted but instead is left at its natural state in order to support ecosystem services. These two types of environmental water differ in that the former entails costs whereas the latter does not. It turns out that this, seemingly negligible, difference entails significant implications regarding regulation implementation. In particular, instream water can be regulated by appropriately incorporating the marginal instream value within the shadow price of natural water, whereas conveyed environmental water requires the use of water quotas. The chapter uses an example of optimal regulation based on the Israeli water economy. The latter serves as a good case study because it includes all sources and sectors discussed in Chapter 2.
Chapter 6 (Accounting for Uncertain Water Supplies: Conjunctive Water Management) develops a framework to account for stochastic water supplies, where both uncertain and stable sources are used conjunctively in order to stabilize overall water supplies. Natural water sources are characterized by fluctuations in their supply. The extent of fluctuations (or variability), however, varies across natural sources, depending on whether the source relies solely on the current year’s precipitation, i.e., a flow source, or accumulates precipitation over a number of years, thus is a stock source (e.g., groundwater). The term “conjunctive water system” refers to situations in which water is derived from flow sources (mainly precipitation), from natural stock sources (groundwater, lakes, reservoirs), and from produced stock sources (recycling and desalination plants). The chapter develops first a simple analytical framework that is then extended to a comprehensive water economy setup that includes the sources and sectors considered in Chapter 2.
Chapter 7 (Case Studies of Regulatory Interventions) presents a couple of case study examples of policy interventions aimed at regulating groundwater extraction and use. The chapter presents policy interventions (pricing, quotas, and removal of subsidies) aimed at reducing negative externalities associated with groundwater pumping. Examples from Mexico and from Spain demonstrate the use of different policy instruments and their effects on the behavior of groundwater users as well as the way negative externalities are regulated. The example from Mexico shows how a subsidy of electricity for pumping groundwater leads to perverse effects resulting in depletion of the aquifer. The example from Spain shows the negative effects of unregulated groundwater extraction via interaction between the aquifer water that is used for irrigation but also by a groundwater-dependent wetland that contributes to ecosystem services.
Chapter 8 (Economy-Wide Considerations of Water Management) presents an economy-wide modeling framework that enables analyzing the direct and indirect impacts of policy interventions on sectors of the economy. The chapter reviews studies that model various policy interventions aimed at improving water allocation decisions within an economy-wide context. It focuses on the “macro-micro linkage” framework that facilitates assessment of various linkages among policies and their impacts within individual sectors and the entire economy. Drawing on country-based studies in Morocco, South Africa, Turkey, and Mexico, the analysis in the chapter reveals trade-offs among various policy objectives, including priorities placed on different sectors, regional advantages, and general economic efficiency gains versus broader social impacts.
Chapter 9 (Management of Transboundary Water) surveys the literature and approaches that deal with the economics and politics of managing water resources that are shared by several states or countries (i.e., transboundary/international water). Principles that are relevant to the analysis of management of shared international water are discussed and demonstrated. One aspect that is unique to international water is the use of agreements between all or part of the riparian states that share the basin. The chapter introduces several means by which cooperation among the riparian states is defined and calculated, using the information embedded in the treaties that they signed. The chapter also provides an example, applied to the case of the Blue Nile Basin, of the effect of using certain allocation methods on the welfare of the river basin riparian states, Ethiopia, Sudan, and Egypt, and its effects on the stability of their allocation agreement.
While this book is a joint effort and both authors contributed to all chapters, we allocated the responsibility for each of the book’s chapters between the two of us as follows: Dinar was responsible for Chapters 1, 7, 8, and 9; Tsur was responsible for Chapters 2, 3, 4, 5, and 6.
As economies grow, their components become more interconnected and the economy as a whole becomes more dependent on global activities. The same holds for the portion of the economy encompassing its water economy. The components that constitute a water economy become more interconnected and the water economy as a whole becomes more heavily dependent on national and international policies. Managing water resources, therefore, requires a comprehensive framework that considers the water economy as a whole rather than a piecemeal approach that looks at different components independently. This book was written with this understanding in mind.
In the interest of widening the potential readership of this book, the analysis is presented in the context of a stylized (prototypical) water economy, while extensions and technical derivations are relegated to appendixes. The modular structure of the water economy framework presented in this book allows straightforward extensions to most real-world situations. We therefore think that the analyses and methods presented herein will be useful to water policymakers in a wide range of circumstances.
The book emphasizes the intersection of economic analysis and policy and the role of institutions in regulating water resources. This is an enormous area and we inevitably leave many aspects uncovered. A (very) selected list of such omissions include: (i) legal and ethical concerns (see Maria Saleth and Dinar, Reference Maria-Saleth and Dinar2004 and works they cite), (ii) technological innovations in irrigation, recycling and desalination (see Tsur and Zemel, Reference Tsur and Zemel2000; Sunding and Zilberman, Reference Sunding, Zilberman, Gardner and Rausser2001; Carey and Zilberman, Reference Carey and Zilberman2002 and works they cite), and (iii) political economy considerations (see Rausser and Zusman, Reference Rausser, Zusman, Dinar and Zilberman1991; Rausser et al., Reference Rausser, Swinnen and Zusman2011, chapter 16 and works cited therein). We hope that the book will stimulate further research of these (and other) issues in the broader context of the comprehensive water economy framework advanced in this book.
