Module: 5 Water Economics

Economic characteristics of water good and services-Nonmarket

monetary valuation methods-Water economic instruments-Policy
options for water conservation and sustainable use, pricing,
distinction between values and charges- Private sector involvement
in water resources management.
Water Economics ????
Water Economics ????
Economic characteristics of water good and services-
Water is the most important natural resource on the planet and without it
no human or any other life could survive. Water resources, however, are
finite, and in many areas water is becoming increasingly scarce.

In a market economy the allocation of scarce natural resources (such as

coal, oil, fish, crops, and timber) is typically determined by trade in
markets. However, water resources have a number of unique
characteristics which mean that traditional market mechanisms can lead
to inefficient and inequitable allocations. This creates questions over
whether water should be considered a public or a private good.
Economic characteristics of water good and services-
Water provides goods &
Water provides services

Water plays distinct roles in each context

Economic characteristics of water good and services-
Water is considered an economic good due to several reasons includes:
 Scarcity
 Demand and supply dynamics
 Utility and benefits
 Production costs
 Trade and market transactions
 Sustainability
 Quality standard
 Water availability across space and time
 Promote water treatment and recycling
 Promote rainwater harvesting
 Promote water conservation
Economic characteristics of water good and services-
Challenges in Assessing the Economic Value of Water:
1) The UN designated access to safe drinking water and sanitation as
a fundamental human right in 2010, recognizing that water cannot
be treated solely as a economic goods to prevent morally
unacceptable outcomes affecting survival.
2) However, once basic water needs are met, additional water use
becomes discretionary. For instance, household activities such as
filling swimming pools, watering lawns, or taking long showers
exceed basic needs and are considered private goods. In such
cases, optimal allocation, like other private goods, is achieved
through market mechanisms.
Economic characteristics of water good and services-
3) Water in its natural state often lacks clearly defined property rights,
making it an open access resource or common-pool resource.
4) The absence of ownership leads to the overuse of common-pool water
resources, as users withdraw water without considering the impact on
availability for others.
According to Dublin Principles “Water has an economic value and should be
recognized as an economic good, taking into account affordability and equity
criteria”
3) This creates questions over whether water should be considered a
public or a private good .
4) Policy and governance constraints
Economic characteristics of water good and services-
3) Water in its natural state often lacks clearly defined property rights,
making it an open access resource or common-pool resource.
4) The absence of ownership leads to the overuse of common-pool water
resources, as users withdraw water without considering the impact on
availability for others.
According to Dublin Principles “Water has an economic value and should be
recognized as an economic good, taking into account affordability and equity
criteria”
5) This creates questions over whether water should be considered a
public or a private good .
6) Policy and governance constraints
Economic characteristics of water good and services-
7) Valuation Methodologies
8) Spatial and Temporal Variability
9) Externalities and Non-Market Values
10) Data Limitations and Uncertainties
11) Equity and Distributional Impacts
12) Price varies with purpose of use
13) Price varies with quality standard
14) Price varies with water sources
 Nonmarket monetary valuation methods

Valuation of market goods

vs
Valuation of Non-market good
 Nonmarket monetary valuation methods
Nonmarket monetary valuation methods for water are techniques used to
assign a monetary value to water resources and related ecosystem
services that do not have readily observable market prices. These
methods are employed to assess the economic importance of water for
various uses, including drinking water supply, agriculture, industry,
recreation, and ecosystem health. Here are some common nonmarket
monetary valuation methods for water:
 Nonmarket monetary valuation methods
There are many ways to approach non-market valuation as highlighted
as follows:
1) Contingent valuation method (CVM)
2) Travel cost method (TCM)
3) Hedonic pricing method
4) Production function method
5) Damage cost avoided method
6) Replacement cost method
 Nonmarket monetary valuation methods

1) Contingent valuation method (CVM)

• Involves surveying individuals or households
2) Travel cost method (TCM)
• Evaluates the expenses incurred travelling to make use
of a good, service, or resource
 Nonmarket monetary valuation methods
3) Hedonic pricing method
Economic value of water-related amenities, such as water quality,
proximity to water bodies, or access to water resources, by
examining their influence on property prices in real estate
markets.
4) Production function method
Analyzes how the quantity and quality of water inputs affect the
production of goods and services in different sectors of the
economy.
 Nonmarket monetary valuation methods

5) Damage cost avoided method

• Estimates the economic value of water quality
improvements by assessing the costs avoided through the
prevention or mitigation of water-related damages.
6) Replacement cost method
• Estimates the economic value of water by calculating the
cost of alternative water supply or treatment options.
 Water economic instruments
Encouraging water users to adopt more sustainable practices is crucial for
achieving water security. Economic instruments offer an effective approach to
drive this change. These instruments leverage pricing mechanisms and other
market-based measures to enhance water management and utilization. By
aligning economic incentives with public interest, they motivate water users to
employ water judiciously, effectively, and in accordance with sustainability
principles. While economic incentives yield positive outcomes by rewarding
users who appreciate water's true value, they also discourage wasteful and
detrimental water consumption through penalties.
 Water economic instruments
Economic instruments are of the following types
a) Tariffs and charges are paid by water users
b) Abstraction charges
c) Water markets
d) Tradable pollution permits
e) Pollution charges
f) Subsidies
g) Payments for environmental services
 Water economic instruments
Advantages
1) Efficient resource allocation
2) Conservation incentives
3) Revenue generation
4) Flexibility
5) Tailored solutions
6) Market-based approach
7) Sustainable management
8) Adaptability
9) Cost recovery
10) Investment opportunities
 Water economic instruments
Challenges
1) Affordability concerns
2) Equity issues
3) Enforcement challenges
4) Regulatory complexity
5) Inequitable distribution
6) Administrative burden
7) Market distortions
8) Potential for unintended consequences
9) Social disparities
10) Impact on vulnerable communities
 Policy options for water conservation
Water conservation policies are crucial for addressing water scarcity,
promoting sustainable water management, and safeguarding freshwater
resources. These policies typically involve a combination of regulatory
measures, incentives, public awareness campaigns, and technological
innovations.
 Policy analysts typically categorize water conservation efforts into
two primary components: the supply side and the demand side.
 Policy options for water conservation
Water supply-side conservation measures focus on optimizing water availability,
identify the source, reducing losses, and improving the efficiency of water supply
infrastructure
1) Water infrastructure upgrades
2) Reservoir management
3) Desalination and water recycling
4) Rainwater harvesting
5) Increases water transport efficiency
6) Water Transfer Agreements:
7) Water body and Wetland restoration
8) Non-revenue water reduction
9) Smart water management technologies
10) Water-energy nexus
11) Public awareness and education.
 Policy options for water conservation
Water demand-side conservation measures focus on reducing the amount of
water used by consumers, businesses, and industries
a) Water-efficient fixtures and appliances
b) Behavioral change programs
c) Landscaping practices
d) Improve irrigation efficiency
e) Rainwater harvesting and grey water recycling
f) Water pricing and incentives
g) Water audits and leak detection
h) Regulations and restrictions
i) Industrial and commercial practices
j) Community engagement
Policy options for water conservation in India
a) Water conservation projects are primarily managed by State Governments due to
water being a state subject in India.
b) The Government of India supports these efforts by providing technical and
financial assistance through various schemes and programs.
c) Key schemes and programs include MGNREGS, Atal Bhujal Yojana, PMKSY,
AMRUT, and others aimed at both rural and urban areas.
d) The Ministry of Jal Shakti has launched the "Jal Shakti Abhiyan - Catch the
Rain" campaign to promote rainwater harvesting across the country.
e) States and Union Territories are encouraged to utilize grants from the 15th Finance
Commission for rooftop rainwater harvesting in government buildings.
f) The Master Plan for Artificial Recharge to Groundwater-2020 aims to construct
numerous rainwater harvesting and artificial recharge structures nationwide.
Policy options for water conservation in India
f) The government organizes workshops, seminars, and awards to promote
water conservation and rainwater harvesting and encourages public
participation.
g) The Central Ground Water Authority advises states to promote and adopt
artificial recharge to groundwater/rainwater harvesting.
h) Traditional methods of water conservation and rainwater harvesting vary
across regions, and the government promotes best practices and encourages
their replication.
i) Overall, the government emphasizes the importance of water conservation
and rainwater harvesting through policy measures, financial support, and
public awareness initiatives.
 Policy options for water sustainable use and pricing
Policy options for promoting sustainable water use and pricing typically aim
to balance economic, social, and environmental considerations while ensuring
efficient allocation and conservation of water resources.
a) Water pricing mechanisms
b) Subsidy reform
c) Water conservation programs
d) Regulatory measures
e) Integrated water resource management
f) Water rights and allocation
g) Climate change adaptation
 Distinction between values and charges
Cost/charges : The expenses incurred by a seller in producing and offering a
product or service for sale. This typically includes factors such as raw
materials, labor, overhead costs, and any other expenses associated with
production and distribution.
Value: The perceived worth of the product or service to the buyer. It is
subjective and can be influenced by various factors such as quality, brand
reputation, functionality, customer experience, and personal preferences.
Price: The amount of money a buyer pays to acquire a product or service. It's
determined by factors such as supply and demand, production costs,
competition, and market dynamics.
Policy options for water conservation in India
 Water values refer to the broader societal, environmental, and cultural
significance of water, including non-economic considerations such as
sustainability and equity.
 Water charges, on the other hand, are monetary payments for the use or
consumption of water, reflecting the economic cost of water supply and
management.
 While water values encompass qualitative aspects, water charges are
quantifiable and aim to recover the costs associated with water
infrastructure and services.
Private sector involvement in
water resources management
Private sector involvement in water resources management

Privatisation of water services means transfer of ownership, property or

the business of water services from the government to the private
sector. This includes services such as operation and maintenance of
water services, bill collection, metering, revenue collection, etc.
 Water vital, UN recognizes as human right. 2006 report
 Enough for all, scarcity from mismanagement, corruption, lack of
infrastructure.
 Econ process shifts resources to tradable.
 Privatization driven by fear of scarcity, need for efficiency.
 Critics cite state inefficiency, advocate market governance.
 Vandana Shiva: privatization denies poor water rights.
 Myths of privatization
There are several myths associated with the concept of privatisation, the most popular being:
 Privatisation saves money.
 Private company does a better job than those in the public sector.
 Privatisation will lead to lower prices and better standards of service.
 Turning the public utilities into private companies results in a dramatic improvement in their
performance and efficiency.
 Privatization needs to be accompanied by minimal regulation.
 Privatization allows governmental entities to better anticipate and control budgetary costs.
 Privatization allows governmental entities more administrative flexibility.
 The public still maintains control over a privatized asset or service and the government
retains the ultimate ability to make related public policy decisions.
 If anything goes wrong, the government can easily fire the contractor or adjust the contract.
 Companies are chosen for privatization contracts on the merits, not based on political or
financial connections.
Background of water privatization: International experience

 Water privatization began in Latin America in the early 1990s and

spread globally to developing nations.
 The World Bank and IMF played significant roles by pressuring
governments to adopt structural reforms favoring private sector
involvement.
 Developing nations faced pressure to privatize water as a condition
of receiving loans and through trade agreements.
 The water sector was targeted for privatization through international
trade rules established by the WTO and GATS.
 Impact of privatization
 Improvement in water service quality.
 Improvement in water production efficiency.
 Diminished water losses.
 Strengthening of management of the water sector,
 Enhancement of customer care.
 Increased water prices
 Exacerbate socioeconomic inequalities
 Lack transparency and accountability
 Profit-driven motives of private companies may lead to over extraction of
water resources and inadequate environmental stewardship
 Water privatization has been a source of social conflict
 Modes of privatisation
Privatisation of Water Supply and Sanitation (WSS) can be several levels
and can be of various types.

1) Service Contracts
2) Lease/Management Contract:
3) Build Own Operate Transfer (BOOT) Contracts
4) Concessions
5) Divestures
 Water privatisation in India
 Water privatization in India began in the late 1990s, with the government's
collaboration with international financial institutions like the World Bank and
Asian Development Bank.
 The entire paradigm of the water sector is seeing modifications manifesting in
changes in water policies, laws and institutions.
 Private companies often violate operation standards, leading to price fixing,
disconnections, and contamination of water sources, disproportionately
affecting the poor.
 The Sheonath river project in Chhattisgarh was one of the initial water
privatisation projects in India. Thousands of people protested against the
government;s decision to hand over 23 kms of the river to private companies
and the banning of the locals from using the river water. In this case,
privatisation was not limited to the water service but extended to the river itself.
 Water privatisation in India
1) Private Sector Involvement: Major global players like Suez, Vivendi, Thames
Water, and Bechtel are involved in numerous privatization projects across India,
as documented by organizations like Manthan.
2) Influence of Aid Agencies: Agencies like DFID, AusAID, and USAID advocate
for privatization, while centrally sponsored initiatives like JNNURM mandate
urban reforms, potentially including water privatization, for receiving funds.
3) Irrigation Sector: Privatization extends to canal operations and comprehensive
schemes, often under the guise of Participatory Irrigation Management (PIM).
4) Future Trends: Concepts like tradable water entitlements and pollution permits
raise concerns about the potential concentration of water resources among those
with purchasing power.