Valuation and Market-Based Pricing of Economic and Ecosystem Services of Water Resources

Valuation and Market-Based Pricing of Economic and Ecosystem Services of Water Resources

Nilanjan Ghosh (Multi Commodity Exchange of India Limited, India) and Anandajit Goswami (The Energy and Resources Institute, India)
DOI: 10.4018/978-1-5225-3427-3.ch008
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This chapter presents a comprehensive review of valuation of water. Though existing literature has a large number of papers on the significant attempts at valuing water, a number of publications only consider certain specific aspects of water pricing, rarely attempting a comprehensive review. Water pricing, whether by government mandate or in practice, has to take into consideration a host of concerns, and hence cannot be confined to bounds of individual disciplines. This chapter presents a survey that attempts to resolve this gap by summarizing accumulated knowledge on valuation of water resources and dealing separately with valuation of water in the economic and the ecosystem sectors. Under each component, a host of studies attempting valuation of water have been reviewed. Finally, the policy implications of water pricing have also been discussed in light of the scarcity value theory.
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With water scarcity on the rise, traditional modes of freshwater management are becoming defunct and obsolete, and new ways are hard to come by. Yet, in the last two decades, water valuation has emerged as an important factor in water management, and it will surely influence policymaking in the coming years. This essay thus reviews the diverse approaches to the valuation of economic and ecosystem services provided by water and offer as well a broad platform for its evaluation.

Over the centuries, allocation of water has been the main problem of water systems management. This brings in economics, and with it the canonical definition of, “… allocation of scarce resources among competing ends.” A number of economists have analysed this problem with institutional economic theories (e.g. Richards and Singh 2001; Brown 1997; Holden and Thobani 1996; and so forth), which call for diminishing transaction costs over time. However, there has been no quantification (or monetization) of the transaction costs due to their improper delineation. This leaves the policymaker with no benchmark. Hence, institutional thinking has, so far, not proposed any tangible, neutral, and quantified instrument for water management. The institutional frameworks are thus often without objective economic instruments, despite their extensive underlying importance.

The problem is that instituionalists have predominantly discussed the economics of property rights and the legal frameworks (instrumental in the formulation of a number of international statutes) on water and in delineating property rights explanations of water disputes (Richards and Singh, 2001; Berck and Lipow, 1994). However, being broad and qualitative, the tenor of institutional thinking only provides some guidelines. As a result, the laws have often been either too rigid to provide easy operational solutions or, at times, so flexible that they can be interpreted by strong stakeholders to their benefit (Chauhan 1981; Tarasofsky 1993). Thus, institutional economics has always discussed broad policy decisions and has only provided theoretical explanations.

The obvious question is whether it is possible to develop an instrument that can complement this broad subjective configuration provided by statutes. In fact, there is yet no domestic legal framework that makes any provision for objective evaluation of disputes. The states thus have to abide by the orders of the courts or by the awards given by those bodies vested with judicial powers to take decisions on water-related matters.

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