Japanese Water Management Systems from an Economic Perspective: The Agricultural Sector - Water and Agriculture: Sustainability, Markets and Policies - page 49

1. Marginal cost bearing : If the farmer faces a water price (i.e., the actual payment in any

form) that is lower than the unit marginal cost, he/she will waste water, because the
marginal benefit of water will be lower than the social cost, and an economic efficiency
will deteriorate.

2. Average cost bearing : Due to the economies of scale associated with the capital

investments required for developing water resources, the average cost, which stands for
financial cost, is usually greater than the marginal cost. If priority were given to
satisfying the first criterion, a financial deficit would therefore be inevitable. On the
other hand, when financial stability or income distribution is given a higher priority and
users bear the financial costs, it would be likely to violate the first criterion. In other
words, there would be a tradeoff between efficient pricing and financial pricing.
Economic theory could not provide clear-cut solutions to this problem and who should
bear the deficit and to what extent, and how the budgetary allocations should be made
are the questions that policy makers would have to face (Lipsey & Lancaster, 1956,
Baumol & Bradford, 1970).

3. Marginal benefit equalisation : If the marginal benefit of one user exceeds that of

another user, a transfer of a part of consumption from the latter to the former will
improve the economic efficiency in the society. This point is essential for considering
the allocation of water between agricultural and non-agricultural sectors in Japanese
water management.

4. Transaction costs of the management : It takes costs to manage the systems themselves,

to collect technical, social and economic information necessary for efficient water use,
and to change the present institutions.

5. Equity and other social justice : This criterion also relates to the public nature of water

and the historical background.

4. Water management in the Japanese agriculture: An evaluation

4.1 The property rights regime
First of all, we evaluate the most fundamental framework of the property rights
regime in Japanese water management, compared with a hypothetical arrangement in
which centralised institutions, such as the government as the representative of society,
manage water resources and charge appropriate prices on users (authority regime).
Particularly in the case of surface water use, the latter systems in many cases are not
realistic based on the fourth criterion above. Availability, on which the marginal (social)
costs of diversion are partly dependent, fluctuates according to the changes in
precipitation and other natural conditions. The scarcity rent is very likely to change yearly
and monthly, and varies by region and by site.
Appropriate pricing to equilibrate the marginal cost to the marginal benefit is
operationally impossible (Sampath, 1992). Another difficulty is pointed out by the World
Bank (2004, p. 23): i.e., farmers do not intend to pay the price from scarcity value,
namely the opportunity cost, because that is invisible and because the general
understanding would be that the water is a common-pooled resource in the society.
Farmers resist paying even for the sunk costs from capital investments, because that is