Water Resources Management - Practices of Irrigation and On-farm Water Management - page 142

5.1.4 Water As an Economic Good
Water should be regarded as “an economic good.” The water at source may be free
in the sense that nobody owns it; but if it is not in abundant supply, then it is scarce
and that condition has important consequences that must be taken account. More
specifically, there are competing demands for water and there must, therefore, be
some mechanism for allocating it. Pricing is one, but not the only, means of effecting
allocation.
We know from the hydrological cycle that water is a renewable resource. Using
water therefore does not typically mean “using it up,” but making it unusable
for other purposes or at least unusable without incurring additional costs, e.g.,
by polluting or diverting it. Investment in a complete and expensive drinking
water supply would typically involve three components: transmission, treatment,
and distribution. Water occurs naturally. At its source, before it is transmitted,
treated, and distributed, no expenditure is incurred. At that point, therefore, it
has not involved costs for anyone. In contrast, if one is talking about a drinking
water supply, which provides a specific quantity and quality of water to a specific
geographic area, that is a different matter. Each of the above three components
requires investment, and the money (for both the initial investment and routine
maintenance/regular operation are equally important) will have to come from
elsewhere. Thus all concerned would surely agree that careful consideration must
be given to where the money is to be acquired from, including the issue of whether
those benefiting will pay some or all of the costs. However, it is crucial to point out
that cost recovery has nothing to do with the general water resources question of
whether or not water should be treated as an economic good.
If water is used for one particular purpose, e.g., agriculture, it cannot be used
for another, e.g., drinking. More specifically, the opportunity cost of water is its
value in alternative use. This implies that there is some sort of hierarchy of demand.
For example, water is most valuable for drinking, followed by industry and then
agriculture. Moving from drinking water supply to other uses, the situation changes
substantially as the broader water resources issue emerges. Suppose an estimate
was made, in the manner described above, of the value of water not only for
agriculture but also for other purposes, say, industry and fishing. The result may
be that water for industry or, less likely, fishing is more viable than for agriculture.
This implies that priority in use, in this particular instance, should be given to
industry rather than agriculture. Mechanisms other than pricing may be used to
enforce this priority. But if it is not followed, economic losses will ensue. Those
losses will not be reflected in direct financial terms; rather the net value of output
will be less than it may have been.
The question now arises, how would an economist estimate the value of water for
agriculture? This can be done by estimating the value of agricultural output from,
say, a hectare of irrigated land and then estimating the contribution by water to that
value. This is a rough and ready calculation, with a rather wide margin of error. But
it is important to note that the value of water per cubic meter thus calculated will be
minimal by comparison with the cost of transmission, treatment, and distribution.