Development Aspects Impressum Editors

Conveying signals of relative scarcity for water resources

Water is a scarce resource performing positive economic functions. In a world of “first-best” solutions, its use should be reflected in a value corresponding to the social opportunity cost of the resource, so that any externality is internalized ⁵ and the allocation of water resources is made “socially efficient“. Water prices, how- ever, do not normally reflect the marginal economic value of water and there is an extreme disjuncture between individual and collective interests. Establishing ef- ficient pricing systems is both a politically sensitive issue and a technical challenge, and consequently water is generally offered at low or zero cost. This applies to the case of the Mediterranean-rim countries, where water misallocation and overex- ploitation are commonplace.

3. 
   An externality is a cost (or benefit) that affects other parties without being reflected in the cost of goods or services involved. Internalizing an externality means correcting its price or cost (e.g., through taxes or subsidies), so that the price reflects the full social value of the resource.
   

Nonetheless, this study argues that the first condition to promote the transi- tion to green water economies in the Mediterranean region is the establishment of appropriate pricing, charging and allocation systems that convey signals of relative resource scarcity to users. At the core of this argument is that the extent to which the social opportunity cost of a resource is reflected in its price has an immense potential to influence actual performances and to encourage a more efficient use of available supplies.

Improving water efficiency, in agriculture and elsewhere, normally requires costly investments. An investment will be undertaken only if it is expected to gen- erate positive returns, which in this context means potential savings on a valued resource (water). However, if the resource is not sufficiently priced, the economic value of the savings will be low, and socially desirable improvements in water ef- ficiency will not be achieved.
More generally, properly working market mechanisms are essential for decen- tralized decision-making in complex systems, such as those related to the use and distribution of water. Instead of market mechanisms, there is a long-standing tradi- tion, especially in water scarce countries of the Middle East, of centralized planning of infrastructure and water distribution schemes. The control over water resources is conceived as a primary source of political and economic power despite the fact that distributional justice as well as technical and economic efficiency can hardly be achieved this way. Rent-seeking, regulatory capture and corruption are una- voidable corollaries of flawed water management systems. Furthermore, vested interests and lobbies, most notably among farmers’ organizations, are active in pursuing and securing privileges, such as easy and affordable access to precious water resources. As in other contexts, lobbying works through strong economic and political pressure exercised by limited groups with high stakes. The negative effects generated are diluted over a very large number of people, so that the con- sequences of inefficiency are barely felt at the individual level.
Inefficiency in water management is reflected in inefficient land use, produc- tion patterns, trade and consumption. On the one hand, for example, the reason why watermelons are cultivated in some semi-arid regions is that it is economically advantageous to do so. This is a direct consequence of price distortions and (ex- plicit or implicit) subsidies on inefficient agricultural production. This makes evident the existence of a wide divergence between private and public interests, which can be seen as a result of the action of relatively small but very active political pressure groups.
On the other hand, it is true that economists usually propose water pricing as a panacea for all problems related to water resources, but in the real world implementing a pure water-pricing scheme often proves to be impossible. Political resistance is an obvious implication of the points discussed above. Technical diffi- culties, for example in metering water consumption, should not be underestimated as well. However, the fact that perfect pricing is impossible to implement should not be an excuse for not trying to fill the currently very wide gap between private and social valuation of water resources. In other words, a pragmatic implementa-

tion of second-best measures is essential for improved WDM, especially in areas like the Mediterranean.

In practice, there are a number of different modes through which the “inter- nalization of externalities” can be pursued. First, a uniform user charge can be introduced, i.e., charging for water irrespective of the level of utilization. Second, area-based or crop-based charges can be applied. Third, government incentives and regulations can be provided to encourage the adoption of best practices. This is the case in Israel, where a large-scale water conservation policy embarked on from 1975 to 1982 has increased low volume irrigation equipment up to 700 per cent (Shevah and Kohen, 1997). Fourth, volumetric charging can be applied, as- sociated with a quota. This is common in the southern and eastern Mediterranean- rim countries, as well as in the USA, Australia and Mexico (Molle and Berkoff, 2007). Fifth, excessive use is discouraged by setting up tariffs varying with the different levels of consumption. A sixth measure is to introduce a market-based price and, finally (indirectly), charge farmers implicitly through the price of other inputs (such as land) or decreasing subsidies for agricultural output.6 These meas- ures (second-best solutions) will improve overall water use efficiency, but will also generate social costs.

2.