Economics of Water Management

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Water is a scarce natural resource. It is not only used as an input to economic activity such as irrigation, household and industrial water use, and hydropower generation, but also provides ecosystem services such as the maintenance of wetlands, wildlife support, and river flows for aquatic ecosystems. Water has been recognized as an essential economic good for its use in economic activity. However, we are facing increasing water quantity and quality problems as a result of population growth, economic development, and climate change. The quantity problem is closely related to water scarcity (increasing demand and declining supply) for the competing use of water resources or damages from floods in river basins, while the quality problem is related to water pollution, which could be caused by negative externalities. These negative externalities cause negative impacts on water users. Economics has been playing an increasing role in both quantity and quality management. As economics is a science about optimal allocation of scarce resources, economic instruments such as prices can adjust demand and supply and deal with externalities. Before the 1970s, water resource management was focused on increasing the water supply, mainly by means of engineering solutions. Since the 1970s, governments and researchers have increasingly been focused on demand management measures, including voluntary water transfers, water markets, and water pricing to limit water demand. As such, economics of water management has evolved as a branch of environmental and resource economics. The basic economic principle in managing water resources is that we need to balance the demand for water and the supply of water resources, which can theoretically be achieved through price signals in water markets. This has led to the emergence of water markets and water pricing. However, water is not a standard private good, because of its physical attributes. The provision of water in the natural environment also follows hydrological cycles. Precipitation, evaporation, and runoff determine water availability in the different seasons at different locations of the globe. Natural water can have specific characteristics related to the questions of whether it is rival or non-rival for the users and whether the users are excludable or non-excludable from its use. All these special features of water resources imply that we may need to manage water resources by means of interventions that go beyond the simple economic system. Therefore, integrated water management, which integrates the economic system and the natural water systems within a broad perspective of socioeconomic, institutional, political, legal, ecological, and cultural characteristics, has become a common option in water resource management.
Original languageEnglish
Title of host publicationEnvironmental Science
EditorsEllen Wohl
PublisherOxford University Press
Number of pages27
ISBN (Electronic)9780199363445
Publication statusPublished - 2015


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