Developing Economic Arrangements for Water Resources Management—The Potential of Stakeholder-oriented Water Valuation - Water and Agriculture: Sustainability, Markets and Policies - page 127

excludable but rivalrous in consumption; in principle, everyone is able to withdraw water
resources from a shared base, or everyone is able to degrade the resource base through
polluting activities, and when one person has used or degraded a given quantity of water,
this water is no longer available in this quality for other users. This means that water
resources are more appropriately classified as common pool resources (Kaul et al. , 1999).
Balancing economy and institutions
The fact that water is a common pool resource implies that market failures are likely
to occur when using economic arrangements for water management, which means that
these arrangements might lead to outcomes that are undesirable from a societal
perspective (Hellegers and Perry, 2004). Broader societal interests require that other
values be taken into account beyond mere market values, such as food security,
conservation of ecosystems, employment, balanced rural-urban development, protection
of vulnerable groups, etc. Thus, the successful application of economic arrangements for
agricultural water management is not straightforward but needs to be balanced with the
use of institutional arrangements to safeguard broader societal interests and to reduce or
mitigate the negative impacts of market failures (Bjornlund and McKay, 2002; Hellegers
and Perry, 2004). In other words, water markets are, by default, regulated markets.
A review of institutional frameworks in successful water markets confirm the need to
combine economic and institutional arrangements, and indicates some of the institutional
factors that are likely to support successful and sustainable application of economic
arrangements in water resources management. These include factors that are equally
important for both the introduction of market arrangements and for other administrative
allocation systems, such as active water user participation, with structures that provide
transparency and accountability among users, an administrative system that registers and
enforces timely water deliveries and a well-maintained water delivery infrastructure
(World Bank, 1999). This implies not only that the lack of well-functioning institutions
cannot simply be bypassed by the introduction of market arrangements, but also that the
lack of well-functioning institutions should not necessarily be a reason to refrain from the
use of economic instruments altogether. When functioning institutions are absent,
institutional strengthening is needed in any case for improved water resources
management.
Nevertheless, there are some additional requirements when one prefers an economic
over a more administrative approach. These include the need for transferable water
property rights and water allocations (in the case of water markets), for information and
transaction mechanisms to facilitate economic transfers, and for a mechanism to deal with
externalities, to negate the effect of third party interests or to mitigate negative impacts
which might occur (Perry et al., 1997; WorldBank, 1999; Bjornlund and McKay, 2002;
Hellegers and Perry, 2004).
The process leading up to the successful introduction of economic
arrangements in water management
Although some knowledge is now available on the institutional requirements for the
use of economic arrangements in water management, still little seems to be known about
the processes that precede the successful introduction of such economic arrangements -
successful here meaning that the introduced arrangements promote a more economically
efficient allocation of water resources, in a sustainable way, and without compromising