Abstract
This paper presents a conceptual framework for both assessing the role of economic instruments, and reshaping them in order to enhance their contribution to the goals of managing water scarcity. Water management problems stem from the mismatch between a multitude of individual decisions, on the one hand, and the current and projected status of water resources on the other. Economics can provide valuable incentives that drive individual decisions, and can design efficient instruments to address water governance problems in a context of conflicting interests and relevant transaction costs. Yet, instruments such as water pricing or trading are mostly based on general principles of welfare economics that are not readily applicable to assets as complex as water. A flaw in welfare economic approaches lies in the presumption that economic instruments may be good or bad on their own (e.g., finding the “right” price). This vision changes radically when we focus on the problem, instead of the instrument. In this paper, we examine how economic instruments to achieve welfare-enhancing water resource outcomes can realize their full potential in basin-scale management contexts. We follow a political economy perspective that views conflicts between public and private interest as the main instrumental challenge of water management. Our analysis allows us to better understand the critical importance of economic instruments for reconciling individual actions towards collective ambitions of water efficiency, equity and sustainability with lessons for later-adopting jurisdictions. Rather than providing panaceas, the successful design and implementation of economic instruments as key river basin management arrangements involves high transaction costs, wide institutional changes and collective action at different levels.
Highlights
A global imbalance between the supply of and demand for water resources is being increasingly realized under population growth pressures, changing distributions of wealth and consumption, and adverse climatic events (OECD 2015)
Political barriers may arise where: supply scheduling, capacity or natural scarcity transition rapidly between elastic and inelastic states (Randall 1981); policy-phasing fails to understand the hydrological realities including incomplete knowledge of future water supply and variability (Loch et al 2014); adopted instruments send different signals in their implementation or co-implementation (Lago et al 2015); there is a lack of clear policy objectives and political buy-in at all levels (Castle 1978); prior policy investments determine the current public and private investment options in river basin management (Garrick et al 2013); and/or there is a lack of institutional support, funding or enforcement of rules (Garrick and Aylward 2012)
We examine how economic instruments to achieve welfare-enhancing water resource outcomes can realize their full potential in basin-scale management contexts
Summary
A global imbalance between the supply of and demand for water resources is being increasingly realized under population growth pressures, changing distributions of wealth and consumption, and adverse climatic events (OECD 2015) This has resulted in future water crises being consistently identified as the single greatest global social threat in terms of impact (WEF 2017). Political barriers may arise where: supply scheduling, capacity or natural scarcity transition rapidly between elastic and inelastic states (Randall 1981); policy-phasing fails to understand the hydrological realities including incomplete knowledge of future water supply and variability (Loch et al 2014); adopted instruments send different signals in their implementation or co-implementation (Lago et al 2015); there is a lack of clear policy objectives and political buy-in at all levels (Castle 1978); prior policy investments (lock-in costs) determine the current public and private investment options in river basin management (Garrick et al 2013); and/or there is a lack of institutional support, funding or enforcement of rules (Garrick and Aylward 2012). Managing water at the basin scale implies assigning economic instruments to a distinctive role within the relevant policy framework, such that they achieve the greatest collective good consistent with the fundamental social- and political-welfare questions discussed above
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