Water as a scarce resource

Despite its widespread scarcity, the majority of societies do not treat water as an economic good or service. If water were treated like other commodities it would be priced to at least cover its cost of supply, including storage, treatment and distribution, so as to ensure its continuing availability. The price should also be sufficient to reflect the strength of demand, to encourage its consumption to gravitate towards those placing the highest value on it, provided essential supplies were assured to all. It should not exceed the payment ability of those needing water, including the poor.

Commodities are bought and sold in markets. Private agents are active in their supply and distribution. In a well-functioning market, the benefit attached to the use of the marginal unit of the commodity (the last one to be sold) is the same for all consumers, so that general welfare cannot be increased by a re-allocation.

These conditions are evidently not those under which water is supplied and used in most cases. The water sector is typified by supply-oriented provision, reluctance to make active use of pricing, allocation by non-economic means, and the persistence of low-value usage in important sectors. Although farmers and industrial firms frequently develop their own water supplies, individually and cooperatively, and private vendors are active in many cities, private enterprise in the supply of urban and rural drinking water systems and large irrigation schemes is the exception rather than the rule.

In most countries, the instinctive response to water stress is to consider supply augmentation. Prices are rarely used to allocate water supplies or to actively manage demand. Water pricing is usually seen purely as an aspect of cost recovery, and in many cases, not only in agriculture, but also in urban supplies and sanitation, does not even achieve that. The resulting paradox is that an increasingly scarce resource is subsidized, discouraging conservation or the reduction of waste. The average tariff in World Bank-financed water projects - probably a better-than-average sample - is only about one-third the average incremental cost of supply.

Most authorities respond to scarcity by non-price devices, such as rationing, prohibited uses, exhortation, or the cutting-off of supplies. Although these can be effective, they can also be costly and inconvenient to users, and do not take account of the relative value of water in different applications.

The benefits from using water typically vary widely from one sector to another, as well as within sectors. Variations up to a factor of 10 or more are common in comparing the value of water for different uses within the industrial and agricultural sectors, and similar differentials apply in comparing municipal and agricultural use values (Bhatia and Falkenmark, 1992). In general, the highest-value water uses are found in speciality crop production, industrial process use, in-house domestic consumption and some recreational uses. The lowest-value consumption tends to be found in low-value farm crops, industrial cooling, and waste assimilation (Gibbons, 1986). This indicates the scope for increasing the total benefit from water consumption by re-allocating scarce supplies.

Another sign of the underdevelopment of markets is the minor role played by private enterprise in bulk supply and distribution. It is no accident that privatization has made least headway in the water sector, and, except in the United Kingdom, it has largely taken the form of concessions and management agreements, rather than full-blooded ownership.

Strong vested interests dependent on cheap water conspire to preserve the status quo. Irrigated agriculture, and industries reliant on large volumes of water or cheap hydropower, can exercise great political influence.

Sometimes the development of a more integrated water market is hampered by physical factors. There may be no practical method of transferring water which is surplus to one sector - or used wastefully - to another which could make more economic use of it. In the neighbourhood of Beijing, surplus agricultural water would need to be collected from groundwater wells and pumped uphill to the city. This sets a limit on how much could be transferred.

Physical barriers to the development of water markets are often underscored by legal obstacles, arising from the prevailing set of property rights. Specific users may have legally-defined rights over the use of water, which lapse if they do not use it for the specified purpose. In other cases, ambiguity over the ownership of water prevents its transfer from one customary user to another. The rights of third parties (including the public interest) in water transfer cases is another consideration, and, indeed, is a necessary part of 'internalizing' environmental concerns into the transaction.

Shifting water onto a more market-oriented basis entails transitional costs, which can be heavy. Metering involves a sizeable resource cost, which has to be weighed against expected water savings. Industries may need to spend sizeable amounts on recycling equipment, or even introducing an entirely new, water-efficient process. In households, campaigns to promote water-efficient devices are costly and time consuming. Socially, ensuring the transfer of water from one sector to another may be disruptive (e.g., may lead to a decline in irrigated farm communities).

There is also a lack of faith in the efficacy of economic instruments. It is widely believed that the price elasticity of demand is simply too low for water pricing to do an effective job in restraining demand and re-allocating supplies. This view is based on an era when water prices were too low to be registered as significant by the majority of consumers. A growing body of evidence from both developed and developing countries, principally in the urban and industrial sectors, shows that consumers do respond to water prices where they are set realistically. Where pricing is used actively in agriculture - e.g., for groundwater sales and in water transfers - there is evidence that farmers respond as economists would predict (Winpenny, 1994).

Economic treatment of water, especially pricing, should be in balance with water as a social good, considering the basic needs of the poor and their limited ability to pay for it. In this context - and far from simple provision of clean water for households - a major role in some countries is provision of water for irrigation to fulfil the basic need for food.