Integrated Water Management EES-33806

1. Integrated Water Management EES-33806 David Zetland Environmental Economics and Natural Resources Group Nov 6: Economic aspects and challenges in IWM

2. Overview • Fishing game (done!) • Lecture (now!) • Auctions exercise (next!) • Q&A (you!) NB: Two exam questions from today’s material

3. The (political) economy of water Fishing game: Institutions and goods interact From theory to practice: • Types of goods, valuing private/public, WTP/WTA, KP • Private vs. social choices / economics vs. politics • Institutions: market, non-market and missing market • BCA (measurement, distribution, decision mechanism) • Monopolies as good conservationists or bad abusers • Managers with intrinsic and extrinsic motivation BL: KP v. control (information); BCA v. OPM (distribution)

4. Manage the good you have(water can be all four types!)

5. Knowing and aggregating values • What’s a demand curve? Value, price and cost • The willingness to pay or accept wedge [draw] • Aggregating values for private goods [draw] • Aggregating values for public goods [draw] • We all face the Knowledge Problem

6. Resource or environmental water? • Resource: economics, prices, markets b/c excludable (no spillovers/externalities) • Environmental: politics, voting, community b/c not excludable (spillovers/externalities) • Institutions: rules & norms on four layers; corruption & community • Markets, non-markets and missing markets, i.e., Coase, Ostrom and Harding.

7. Mismanaging urban water (private good as a club good) • Average cost pricing means buy high sell low • Cost-based pricing excludes resource value • Ex: we run out of water but not gasoline • Suits the rich who have service • Fails the poor who cannot get service (MDG) • (Harms the environment due to overuse) Policy: Raise prices in scarcity to end shortage, i.e., full cost v. subsidies and political intervention

8. Mismanaging social uses(common-pool as club good) Rival and non-excludable groundwater will be over-pumped without controls on access or use. Environment suffers today or we suffer tomorrow. Infrastructure that benefits a few (club good) but paid by many (public good), e.g., dam with reservoir for irrigation and recreation. CBA abuse: projects with benefits>costs are good unless: • benefits or costs are misstated • benefits to one group; costs to another, e.g., farmers and taxpayers • the value of scarce water is zero Policy: Project beneficiaries should pay costs.

9. Monopolies and managers • Monopolies undersupply to raise profits or reduce costs (non-profit). Bad for service, good for resources • Water monopolies are hard to regulate due to KP • Managers with intrinsic and extrinsic incentives • Good managers (e.g., Phnom Penh) help; bad managers (e.g., Las Vegas) are not replaced Policy: Judge managers on outcomes.