Cost benefit and water resources policy: a survey

Water Policy 14 (2012) 250ndash280

Costndashbenefit and water resources policy a survey

doi 10

copy IWA

Frank A Ward

Department of Agricultural Economics and Agricultural Business New Mexico State University Las Cruces NM 88011 USA

E-mail fwardnmsuedu

Abstract

This paper reviews recent developments in costndashbenefit analysis for water policy researchers who wish to under-stand the applications of economic principles to inform emerging water policy debates The costndashbenefitframework can provide a comparison of total economic gains and losses resulting from a proposed waterpolicy Costndashbenefit analysis can provide decision-makers with a comparison of the impacts of two or morewater policy options using methods that are grounded in time-tested economic principles Economic efficiencymeasured as the difference between added benefits and added costs can inform water managers and the publicof the economic impacts of water programs to address peace development health the environment climateand poverty Faced by limited resources costndashbenefit analysis can inform policy choices by summarizingtrade-offs involved in designing applying or reviewing a wide range of water programs The data required to con-duct a costndashbenefit analysis are often poor but the steps needed to carry out that analysis require posing the rightquestions

Keywords Cost benefit analysis Decision support Water policy

1 Background

Improving the economic efficiency of water use lies at the center of many current policy challengesSome of these challenges include promoting economic development advancing peace dealing with cli-mate eradicating poverty protecting the environment and improving health Costndashbenefit analysis(CBA) is an analytical technique for measuring the economic efficiency of public actions by translatingpositive and negative effects to a common measure normally money CBA has a long history beginningin the 19th century in France where Dupuitrsquos classic paper on the economic benefits of bridgesappeared in 1844 163 years after the completion of the famously expensive Canal du Midi which heav-ily taxed the French treasury In the 20th century CBA first came into widespread use in the US whereit owed its origin to the politics of financing water projects in the early 1900s By 1950 in an attempt todeal with the requirements of the Flood Control Act an inter-agency water resources committee

2166wp2011021

Publishing 2012

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This article may be used for research teaching and private study purposes Any substantial or13systematic reproduction re-distribution re-selling loan or sub-licensing systematic supply or13distribution in any form to anyone is expressly forbidden
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F A Ward Water Policy 14 (2012) 250ndash280 251

produced the lsquoGreen Bookrsquo the first attempt to define principles standards and procedures for measur-ing the benefits and costs of federal water projects The Green Book was updated in 1962 then later in1979 and 1983 The updates continue The principles standards and procedures governing the use ofCBA for federal water and environmental programs continue to see vigorous debate in the Obamaadministration1While CBA has its origins in economic feasibility studies of public water projects such as irrigation

flood control water supply and electric power projects its scope has widened since the 1970s to informthe design of laws and regulations to protect health safety and environmental values Since the mid1990s legislation proposed by the US Congress (if adopted) would have expanded the use of costndashbenefit analysis in the regulatory process Because of differences between the planning developmentand regulatory missions of the agencies who conduct CBA and risk assessment the reform legislationhas generated considerable debate and controversy Greater use of CBA to inform water policy decisionswould significantly change how government agencies develop and implement certain types of regu-lations The debates involve more questions of how intensively and to what end CBA should bepracticed than whether or not it should be CBA is already widely used by many US Federal waterand environmental agencies in assessing regulatory activities and proposed programsThe question of how economic principles can be used to identify better ways to mitigate damages

caused by extreme weather events and climate change continues to receive widespread attentionRecent record losses of life and property damage caused by floods in Asia and Australia show thatthe need for economical ways to mitigate damages continues to rise So the question of the economicvalue of programs that could limit damage from floods drought and other extreme water events con-tinues to receive international attention In addition debates continue to surround decisions on waterconservation development allocation trans-boundary water allocation and environmental improve-ments in both the developed and developing world Debates are especially intense where there iscompetition between food production energy generation key ecological assets and urban water usesToo much water too little water water at the wrong time the wrong place or of the wrong qualityall present a water problem for which policy interventions are neededIn the face of these debates people who are not specialists in the economics of water resources may

be overwhelmed by the range of benefits and costs that are claimed for various proposed water pro-grams Yet better understanding may require consultation with lengthy background sources Few

1 The following is a very short list of landmarks in the development of CBA for US federal water projects and programs (forwhich an excellent and detailed summary is presented in Hufschmidt 2000) US Flood Control Act (1936) required thatfederal flood control projects be funded only to the extent that lsquohellip the benefits to whomsoever they may accrue exceed theestimated costsrsquo Green Book Proposed Practices for Economic Analysis of River Basin Projects issued by Subcommitteeon Benefits and Costs (US Federal Interagency Committee 1950) Bureau of the Budget issues Budget Circular A-47 oneconomic principles and procedures for water resources projects (US Bureau of the Budget 1952) revised version ofGreen Book issued by Subcommittee on Evaluation Standards of the US Inter-Agency Committee on Water Resources (USInter-Agency Committee 1958) five landmark critiques of CBA published (all are great reads) Eckstein (1958) Krutilla ampEckstein (1958) McKean (1958) Hirshleifer et al (1960) and Maass et al (1962) US Presidentrsquos Water ResourcesCouncil (1962) issued Senate Document 97 US Water Resources Council (1973) issued improved planning standards forfederal water agencies The US Water Resources Council (1983) issued procedures for which the president approved theEconomic and Environmental Principles and Guidelines for Water and Related Land Resources Implementation

F A Ward Water Policy 14 (2012) 250ndash280252

published works are available that distill the scope of modern economic concepts and tools that areavailable to inform water management and policy debates2This paper reviews the current research on CBA applied to water resources programs and describes

how it can contribute to improved performance of programs that address contemporary water policychallenges While flooding has caught international attention since late 2010 climate change maybring about a range of extreme weather patterns with increased scope for unexpected shortages or sur-pluses In light of these recent events many countries likely plan to spend large amounts of money andother resources to cope with drought mitigate floods and implement improvements in water institutionsThe review presented here provides an economic framework to inform a range of debates on the mosteconomical use of water and related capital for water resources programs Its intent is to provide a refer-ence resource for researchers who wish to access modern applications of CBA that can be used to informcurrent water policy debates

2 Conceptual framework

Water takes on an economic value when its supply is scarce relative to demand for all its uses In dryplaces economic and population growth increase the scarcity of water (Yang amp Zehnder 2002) In theseareas not only is water scarce but money manpower land and related resources that are required todevelop allocate adjudicate store measure recycle remove convey and purify water are alsoscarce Competing claims for money and other resources and the economic and political difficulty ofincreasing taxes to pay for water programs constrain water programs While the political process usuallydetermines which programs are undertaken there also is a need for a consistent set of economic stan-dards by which competing water policies and programs can be reviewedEconomic principles that can inform water policy debates rest on the concepts of benefit and cost3

For example releasing water from a storage reservoir to increase streamflow may increase endangeredspecies habitat Using the standard of economic efficiency an increased total net value produced bysocietyrsquos scarce resources from that action is considered desirable Where the efficiency criterionis embraced the action should be undertaken if its added cost is less than or equal to the added benefit4All the added costs resulting from a proposed action are its marginal costs the additional benefit is itsmarginal benefit If policies established are limited to those that increase economic efficiency a waterprogram will be implemented only if its marginal benefits equal or exceed marginal costs5 For publicwater policy proposals maximum beneficial use of water and its complementary resources requires thatgovernment formulate implement and evaluate their water resource program plans using these

2 Some of the better-known works on CBA applied to water include McKean (1958) Eckstein (1958) Maass et al (1962)Young amp Gray (1972) Young amp Havemen (1985) Griffin (1998) and Hufschmidt (2000)3 Recent reviews of the economic theory underlying the economic valuation of water include Molden et al (2001) Tilmantet al (2008) Viscusi et al (2008a b) and Harou et al (2009)4 For example increasing streamflows by an average of 50 cubic feet (1416 m3) per second may add 250 units of endangeredspecies habitat to support a key ecological asset which might be worth $US4 each The gross benefit of this policy is 250 times$4frac14 $1000 The net benefit is positive if the cost is less than $10005 This is the equi-marginal principle Where the economic efficiency criterion is relevant it will be applied to whatever is thesmallest quantity over which decisions are made and data can be made available It will also be applied to all incrementaldecisions in a community whether they are made by private business or by public action


economic principles The aim is to increase the social benefit from the water used and not just the quan-tity of water used itself

21 Policy goals

211 Economic efficiency A CBA can inform policy choices based on the objective of improvedeconomic efficiency (Khan et al 2010) For a program to meet the efficiency goal benefits mustexceed costs Targeting the efficiency objective increases the likelihood that government actions willplace burdens on businesses and consumers that are only in proportion to improvements in healthsafety (Dwight et al 2005 Jeuland amp Whittington 2009) or the environment (Diebel et al 2008)6Those opposed to the exclusive use of economic efficiency argue that other goals are also importantsuch as equity and sustainability

212 Equity Water policies enacted typically redistribute economic benefits and costs in new wayscompared to the status quo For example a recent study described the importance of irrigation in con-tributing to the livelihoods of more than 1 billion people living on less than US$1 a day Making cheapwater available for farming may be inefficient in the sense of economic benefits falling short of projectcosts However the performance in terms of social equity through reduced poverty greater nutritionmore food production more employment and increased self-reliance of small farms may make theseprojects attractive politically (Namara et al 2010)

213 Sustainability One celebrated definition of sustainable development was proposed by theUnited Nationsrsquo Brundtland Commission in 1987 lsquoSustainable development is development thatmeets the needs of the present without compromising the ability of future generations to meet theirown needsrsquo Yet defining measuring and applying sustainability is a major challenge (Thompsonet al 2009 Fagan et al 2010) CBA has the potential to make a contribution in the search for sustain-able water policies (eg Everard 2004) One method for applying CBA to water systems is describedby Ward amp Pulido-Velazquez (2008) in which policies are identified that increase discounted net pre-sent value while returning reservoirs aquifers rivers lakes and other water stocks or their substitutes tobase year starting values

22 Policy instruments

In the water arena government possesses a wide range of policy instruments to adjust existing wateruse patterns and hence alter social welfare As such government faces a huge maximization problemselecting for all future periods the complete range of instruments to maximize social welfare subject tophysical financial and institutional constraints Unless the scope is greatly limited this maximizationproblem is too big to be solved To make the problem manageable it is customary to split up the

6 An economic feasibility test asks whether the (economic efficiency) benefits are larger than the costs in discounted net presentvalue terms A financial feasibility test asks whether the receipts collected can pay for the financial costs incurred in discountednet present value terms Both are important questions to answer The economic feasibility test is passed if the overall economyis improved by the intervention while the financial test is passed if the taxpayer can be reimbursed financially for monetarycosts incurred


problem into smaller parts The typical approach is to consider the effects of a limited number of water-related instruments on social welfare A few are discussed below

221 Laws The conceptualization formulation and drafting of laws that increase benefits by morethan costs is an example of using CBA for democratic ends (Brinegar amp Ward 2009)7 Requiring aCBA poses a stringent test that can help screen out weakly-performing legislation Water laws well-designed and enforced can compensate for the poor match between waterrsquos natural supply and its eco-logical or human demand Good water law must be flexible evolving in response to changes in humanvalues technologies political systems and settlement patterns

222 Regulations Government has a role in influencing water allocation and affecting economic effi-ciency by regulating various dimensions of water use (Odom 2010) Where the market mechanism failsto achieve economically efficient water use patterns regulations can be an important way to improve thenet benefits that the use of water creates This holds true when numerous water uses in several timeperiods in a river basin influence each other in such a way that water markets are unable to capturethose interdependencies through water trading Regulations can be set on water use quality or pollutionlevels timing place purpose of use or transfers of water or water rights Supported by an underlyinglegal framework regulations require permit or restrict particular activities or prescribe specific results inconnection with water use An economically efficient regulation is one for which economic benefits out-weigh its costs in present value terms (Huhtala amp Marklund 2008)

223 Supply adjustment Some of the worldrsquos fastest growing populations are found in dry locationslike the Middle East (MacDonald et al 2009) These places typically are on the lookout for new sourcesof water to meet growing demands One source is found in interbasin transfers which involve takingwater from a river basin of origin and exporting it to a destination basin typically to places wherewater is scarcer andor political power is greater (Gupta amp Van der Zaag 2008 Zhang et al 2009)One such example is the widely-publicized lsquopeace pipelinersquo through which water would be transferredfrom its origin in the TigrisndashEuphrates Basin in Turkey to various drier parts of the Middle East such asthe Jordan Basin (Hussein amp Al-Jayyousi 1999) Another is the Spanish National Hydrologic Planoriginally proposed as a way to bring water from the wet Ebro Basin to the drier eastern and southernpart of Spain (Tabara amp Ilhan 2008) Recent history shows that interbasin transfer proposals typicallyfall short on economic efficiency long before they are blocked by legal political or environmentalconstraintsWater treatment is another way to increase effective supply The decision whether or not to treat water

asks whether it is economically desirable to remove pollutants in the sense of producing a positive netpresent value (NPV)8 One example is the desalination of sea water to produce freshwater which iswidely discussed in certain parts of the Middle East where water sharing agreements are unlikely tobe reached any time soon (Fisher et al 2005) Desalination is expensive so it results in a favorableCBA only in places where desalination is cheaper than a very unreliable freshwater source Falling

7 The mechanics of using information on the time path of costs and benefits to compute the discounted net present value orother overall metrics of economic performance is described in many places8 The NPV equals the discounted value of gross benefits summed over the life of the project minus the discounted value ofgross costs


costs of desalination will increase its economic attractiveness A CBA offers a framework to inform thedebate over whether how much what kind and when water treatment should occur

224 Demand management Unlike supply expansion demand management avoids water shortagesby limiting demand (Kenney et al 2008 Molle et al 2008) It relieves shortages by making greateruse of existing supplies reducing demand or altering the timing of demands all of which can avoidthe need for new supplies Demand management aims to squeeze more beneficial use out of existingsupplies in several ways Examples include discovering and fixing leaks improving revenue collectionenforcing regulations recycling and reusing water metering pricing and using markets All aredesigned to increase user benefits with the hope of making existing supplies go further

225 Integrated management Integrated management embraces the principle that water supplies anddemands can be managed jointly in the search for the least-cost mix of measures to avoid shortages(Silva-Hidalgo et al 2009 Zhang et al 2009) Practically this means linking the phased developmentof new water supply to pricing or conservation incentives to eliminate shortages caused by growingdemands For example through conservation and water recycling programs water utilities can limitor even reduce demands In some cases these demands can be reduced even in the face of growing popu-lations thus delaying the need to develop or build expensive new supply sources New supply sourcesare typically expensive and include things like new reservoirs decreasing supplies of key ecologicalassets buying farmlands and building pipelines

226 Marginal cost pricing Many long-established cultures embrace the view that water should befree (Yang et al 2003 Gohar amp Ward 2010) While this view if implemented produces desirableequity properties it imposes heavy burdens on financing supplies for basic human needs (egDagdeviren 2008 de Bon et al 2010) CBA can therefore play an important role in the search for insti-tutions that encourage more efficient uses of expensive water One way to promote economicallyefficient water uses is to show waters users the marginal cost of their useConnection charges are a form of marginal cost pricing These charges can be imposed for expanding

distribution systems to new residential or industrial developments Cost recovery by pricing these con-nections at their marginal cost sends an important message about the costs that new developmentsimpose on water distribution systems Pricing this additional use at its full marginal cost can contributeto economically efficient growth patterns in a systemrsquos scale both in terms of limiting urban sprawl andlimiting expensive self-supplied connections that occur in rural areas Charging for externalitiesespecially where there are important upstreamndashdownstream interactions among multiple users in aninterconnected river basin is a form of marginal cost pricing (eg Ramirez et al 2011)Remarkably water trading can be an economically efficient institution that effectively amounts to a

marginal cost pricing arrangement The price paid by the buyer to a potential water seller signals the mar-ginal cost of continuing to use water in its existing use The implementation of water markets oftenrequires investing a considerable cost of administrative and institutional support These costs includethe high cost of measuring and defining property rights through measures like stream adjudicationsPeak load pricing is the practice of charging higher prices at times of peak demand typically in mid-

summer It is practiced because much of the capital cost for a water utility comes from meeting peakdemands particularly summer residential water demands in hot dry places Peak load pricing canhave an attractive CBA because it informs customers of the added cost of their peak period use Through


its effect on water use incentives charging higher prices in peak demand periods can greatly reducedemands in those periods therefore avoiding expensive capacity expansion costs over time It canalso be an economically efficient way to promote water conservation in urban or irrigation usessince it provides incentives for reduced water demands during the period in which water supplies aremost likely to be capacity constrained

227 Two-tiered pricing A special kind of marginal cost pricing known as two-tiered pricing com-bines elements of economic efficiency equity and sustainability Here is the dilemma pricing water toolow while attractive on the grounds of social justice in securing the human right to water makes it dif-ficult for a supplier to recover costs sustainably In many poor areas of the world where privatization ofwater has been implemented millions of people have been cut off because they could not afford to paytheir water bills (Zaki amp Amin 2009) One way to deal with the conflict between equity and economicefficiency sustainability is to set up a two-tiered pricing system in which the price for all water use inexcess of the required minimum is raised to a level higher than the average cost The price should behigh enough to make up for the financial losses from pricing basic needs below the average cost Acelebrated analysis of multi-tiered pricing for the Los Angeles urban water utility (Hall 2009)showed that this pricing system presents three advantages

bull equity ndash nobodyrsquos health suffers from bad water or water that is too expensive to buybull efficiency ndash by charging a price approximately equal to the marginal cost for all use levels that exceedbasic needs that price signals the real scarcity of existing use thereby discouraging a high cost ofserving low valued uses of water and

bull financial sustainability ndash by recovering costs the utility and its water supply can last whereas withoutthis sustainability the water will not flow for long

228 Payments for Ecosystem Services Payments for Ecosystem Services (PES) are receiving con-siderable attention among water users and policymakers because they can create funding opportunitiesfor biodiversity protection and other key ecological assets that improve human welfare Much recentresearch has described measures to target and implement PES in order to maximize their economic effec-tiveness One of those principles is the bundling of various parts that contribute to intact ecosystems in PESschemes that would increase societyrsquos NPV One recent paper describes a method for selecting sites forPES where the main interest is to bundle biodiversity with other ecosystem services (Wendland et al2010)

229 Water rights adjudication A general stream adjudication settles all the claims of water rightholders with respect to each other within a particular water system such as a river basin For examplein the US it is a legal process conducted through the courts that is used to determine the extent andvalidity of existing water rights An adjudication can determine rights to surface water ground wateror both An adjudication creates no new wet water It only establishes existing water rights often interms of priorities under various water supply levels among the competing users who claim the rightto use water from a stream or aquifer An adjudication is a mechanism to provide legal clarity forwater right holders When the court adjudication confirms a water right that right becomes enforceableagainst other water users and can be protected from impairment by illegal non-adjudicated users


Adjudicated rights can be regulated in favor of senior water right holders during times of water shortageAdjudications serve the important function of providing information needed for the granting of newrights and proposing changes to existing rights Adjudication provides a foundation for managing theuse of water in an orderly way especially important during periods of drought CBA has a role toplay in helping to identify the economic performance of various ways to assign property rights inbasins where there has never been such a formal assignment A recent example of the use of CBAfor this purpose was its use to inform ongoing policy debates surrounding proposed systems of waterrights that could be established for irrigation in Afghanistan (Torell amp Ward 2010)

23 Scope of value

A comprehensive CBA states whose benefits and whose costs are counted which is termed thelsquoaccounting stancersquo ie the point of view from which costs and benefits are measured For example arecent paper applied CBA to evaluate an interbasin water transfer proposal for a major river basin inIran (Mahjouri amp Ardestani 2010) In that paper the accounting stance was limited to people wholived in that river basin For programs that are national in scope use of a national accounting stancerequires measurement of the social opportunity costs and economic values for all inputs and outputsand for all people in the nation affected by the program CBA has also been performed for accountingstances with a more limited scope eg regional and local high and low income groups A recent analysisfrom Brazil describes the use of CBA to evaluate impacts to current and future generations associated withalternative groundwater exploitation policies under various climate change assumptions (Zagonari 2010)

24 Incremental value

More efficient policies may be designed by using CBA to identify incremental benefits and costsresulting from a range of various incremental changes9 rather than a single all-or-nothing proposal Agood example is a recent analysis of various incremental infrastructure improvements in Sicily Theauthors introduced a simulationoptimization procedure to assess the selection of infrastructure alterna-tives in a complex water resources system containing multiple reservoirs and several purposes for a bulkwater supply scheme (Arena et al 2010)

241 Equimarginal principle The incremental (marginal) benefit represents the contribution of onemore unit to economic efficiency It is measured by the change in total benefits from one more policyunit For example recent research from Australia describes the development of environmental responseschedules that allow the marginal benefit of water to the environment to be compared to its marginalcost to support and inform policy debates (Horne et al 2010) Use of the equimarginal principleallows environmental recommendations to be more readily translated into rules that can be implemented

9 The efficiency objective compares total benefits to total cost However an important issue affecting the conduct of CBA is thecase in which there occur widely distributed benefits versus small but concentrated costs History has shown that economicallybeneficial water interventions (those for which discounted net present value (DNPV) are highly positive) are blocked by thepowerful voices of a well-organized few who in total bear a small level of total costs compared to the widely-dispersedbut much larger total welfare gains of the many The high costs shouldered by the few block the benefits to manyresulting in economically efficient interventions failing to be launched


on the ground Horne et al (2010) describe why information on marginal benefits and marginal costspermits encourages and allows economic information to support operational water managementdecisions Many programs are intended to develop a river basin or to expand the scale or scope ofan existing set of water uses For example a larger scale occurs if an environmental regulation onwater pollution is tightened as shown for a recent study on salinity control in Australia (Nordblomet al 2010) A larger scope could occur if it applies to a wider geographic region or more economicsectors Where this occurs economic efficiency requires that the development or expansion be under-taken until the marginal benefit of the expansion equals the marginal cost Some proposals wouldreallocate scarce water among competing users or redistribute scarce taxpayer resources among compet-ing water quality improvements For the reallocation decision economic efficiency occurs whenmarginal benefits per unit of water are equal for all uses and users (Horne et al 2010)

242 Ex ante versus ex post analysis Many applications of CBA address ex ante policy debatesquestions that ask about benefits and costs of policy actions not yet taken If researchers conductedonly ex ante analysis policymakers might never learn from past mistakes (Dombrowsky et al 2010Schreinemachers et al 2010) By contrast ex post analysis looks backward and asks how well an exist-ing project program or regulation performed after it was established (Becu et al 2008 Henriksen ampBarlebo 2008) Ex post analysis has been used for three purposes

bull to review the stream of actual benefits and costs produced by actual projects built or policies enactedThat information can be used to see if the previous ex ante CBA was accurate and if not what errorswere made

bull to revise methods forecasts and assumptions where mistakes were madebull to gain information on the existing economic impacts and values on which future CBAs ultimately rest

243 High stakes programs The need for a CBA increases in importance as a policyrsquos stakes areraised However up-scaling a CBA raises the cost and these added costs are good investments onlyif they inform important policy decisions (Kaffo amp Fongang 2009 Alexander et al 2010) For pro-grams whose anticipated costs far exceed their expected benefits the measured negative net benefitscan provide valuable information to decision-makers on the costs incurred by carrying out the programDecision-makers often wish to weigh factors other than economic benefits and costs into their policydecisions such as environmental justice or environmental damages Yet even in these cases CBA pro-vides valuable information by measuring the economic efficiency lost (losses in NPV) fromimplementing an economically weak program or the economic efficiency benefits unrealized from fail-ure to carry out an economically strong program

244 With and without principle This principle states that the right way to measure a programrsquosbenefits and costs are as increments that would occur with the project or program compared to thebenefits and costs without (Griffin 1998) Following this rule assures that measured benefits (orcosts) are due solely to the program or project rather than changes that would have occurred even with-out the project Benefits and costs should be measured with the policy compared to without the policynot before and after Accomplishing this aim requires a baseline policy to be defined Defining that clearbaseline avoids the double counting problem


245 Timing sizing and sequencing In the face of growing demands by environmental interests formore environmental regulations or for more environmental projects the NPV of benefits may beincreased by altering the timing of those projects (Pearson amp Collins 2010) NPV could be improvedby postponing a project or regulation even though it produces a positive NPV if carried out right awayThe benefits of waiting will exceed the costs if net benefits are growing at a percentage rate larger thanthe discount rate For example suppose the discount rate is 6 and immediate implementation pro-duces a positive NPV equal to X If waiting one year to implement the project produces a NPVequal to anything larger than 106 X it is economically efficient to waitThe sizing or scaling of a water program or water infrastructure can be important for its economic

performance (Laser et al 2009) A program that has weak performance on a small scale may performbetter at a larger scale A parametric CBA in which the scale is varied from small to large while holdingother assumptions constant can be used to find the optimal scale (that maximizes NPV) A goodexample of this analysis is a study that evaluated a range of different scales in which a proposedhydropower project could be built (Anagnostopoulos amp Papantonis 2007) Program or policy elementsare not always independent so adjusting the sequencing of project elements can sometimes increaseNPV Implementing one program may influence the benefits or costs produced by a related programFor example introducing environmental regulations that improve human health (eg water quality regu-lations) before introducing a program whose output is mostly aesthetic (eg instream flow for sportfishing) may produce greater economic efficiency than introducing the programs in reverse order Ifregulatory resources are scarce then where one programrsquos outputs influence other programs benefitsor costs it may be most efficient to consider several time sequences for introducing the programs

25 Sources of value

The economic value of water comes from the many uses towhich water can be put to satisfy human needs(Young 2005) or uses to sustain key ecological assets (Rayner et al 2009) Water has value in the dimen-sions of quantity quality timing and location As a consumer good for household use waterrsquos use dependson its price and priorities Depending on the price and availability of piped-in water to peoplesrsquo homes typi-cally water is used first to drink then to cook then for toilets and bathing then for cleaning clothes anddishes and finally (in dry places) for landscape and crop irrigation (Brown et al 2009) The quantityof water used for each of these household uses is larger as waterrsquos price is lower With that in mind theeconomic value of water is defined as the amount that a rational user of a publicly or privately suppliedwater resource is willing to pay for it10 For example people will use water to irrigate their lawns cleantheir driveways or for low-valued crops only if the price of water is suitably low (Cai et al 2008) At ahigh price none of these uses produces a high enough economic value to make it affordable11

10 The willingness to accept payment in place of receiving the water is another way to define the waterrsquos economic value It istypically larger than willingness to pay (Del Saz-Salazar et al 2009 MacDonald et al 2010) Willingness to pay orwillingness to accept can also be applied to water-related services such as hydroelectric power flood control and ecosystemrestorations11 An efficient water price assures that expensive water is not put to low-valued uses But a fair price of water is defined as aprice for basic needs which everybody can afford to pay Depending on the country context or culture the fair price may be aslow as zero for the first few gallons daily International political experience has shown that it is important to keep the price ofessential water uses cheap


26 Special issue in valuation

261 Waterrsquos unique characteristics Water transpires flows evaporates and seeps Taken togetherthese characteristics make it hard to measure either water supply or use So the exclusive private prop-erty rights that are the foundation of a trading economy are hard to establish transfer and enforce Watersupply is variable in time space quality and quantity Waterrsquos abundant supply and solvent propertiescreate a capacity for assimilating and absorbing pollutants and waste A given river or river basin may betapped by a wide range of public and private users as water flows from the top of the watershed to theexit point Water is rarely fully depleted by any one use Return flows from upstream users may bereduced in quantity and degraded in quality These create numerous challenges for subsequent down-stream users ndash problems which may require complex public allocation institutions for total benefitsfrom use to reach their potential (Bel amp Warner 2008 Guan amp Hubacek 2008) Water is often usedfor more than one purpose Reservoirs and other infrastructure can store or release water for urbanuse irrigation flood risk reduction power production securing key ecological assets (Turner et al2000) and for various kinds of outdoor recreation

262 Stocks versus flows Water stocks are measured at one point in time and represent a quantity thatis present at that point accumulated over all previous periods (Turner et al 2010) Reservoir storagevolume the stock of water in a non-rechargeable aquifer land in production and water infrastructureare all important stocks related to water Water flows are measured over an interval of time Flowscan be measured per unit of time (eg a year) Streamflows aquifer recharge reservoir releases reser-voir evaporation water used by crop growth water supplied to urban pipes and their associatedeconomic benefits are all examples of water flows The stock of water in a reservoir is the volume ata point in time while what enters or exits can be measured in flows per unit timeWater stocks and flows have different units so they cannot be directly compared Still both economic

benefits and costs are influenced by adjusting either water stocks or water flows (eg Brinegar amp Ward2009) The storage volume of a reservoir contributes to reservoir recreation for a period even with nochange in inflow or outflow For a given installed generation capacity the actual hydroelectric powercapacity is based on how far the water falls as it passes through the turbines based on the reservoirrsquosdepth at a point in time a stock So if inflows and outflows are equal the stock is constant while posi-tive benefits are still produced by hydropower and recreation over a period of time in which that stockremains constant The stock of unused reservoir storage capacity contributes to flood damage preventedas shown by widely-publicized events in Pakistan and Australia beginning in late 201012 A big chal-lenge in managing a river basin is to find the best performing trajectory of stocks and flows of waterover uses and periods

263 Complementarity versus competition Water is unique Its use for one purpose at a given timeand place does not always displace its use elsewhere at a later time or for another use (Heidecke ampHeckelei 2010) Waterrsquos re-use potential is an important factor influencing water administrationespecially where water or water rights are being transferred to new uses or where third-party effectsassociated with a proposed change in use are large Holding water in a reservoir raises current and

12 Attitudes towards risk have a major influence on the value of programs that reduce flood damage


future recreational and hydroelectric values so in that case recreation and hydropower are complementsand not competitors Where two or more uses compete such as instream flows of water for endangeredspecies habitat competing with water for agriculture a measure of water use is required to express econ-omic values with a common denominator A common choice of the appropriate measures of use isbetween withdrawal and depletion13

264 Total average and marginal value Some major distinctions among the many economic con-cepts of value include those relating to total marginal and average value The total economic value froma given supply of water is measured by the total willingness to pay for a given level of water used (Yanget al 2008) Waterrsquos marginal value is the contribution of an additional unit of water to achieving therelevant objective14 Information on the marginal value of water informs debates on water developmentand allocation For the development case efficient decisions dealing with increased water supply requirethat water development be expanded as long as the marginal value of the added capacity exceeds itsmarginal costWaterrsquos average value is its total value described above divided by the quantity of water supplied

Average value is typically of less policy interest than marginal or total value Still its ease of calculationmay engage the project supporter into using it to represent marginal value Compare the misuse of aver-age values to the correct analysis of marginal values for policy analysis The marginal gain from addedwater is what farmers could be charged for the additional units of water and still stay in business Forcertain low-valued uses of water like cattle feed marginal values can be less than one percent of averagevalue (Ward amp Michelsen 2002)

265 Direction and size of supply change Some water supply developments are large enough toaffect the national supply and price of crop or livestock derived from the added water brought to aregion (eg Webber et al 2008) Good examples are water policies directed at limiting costs of climatechange that would affect national agricultural markets Policies that alter electric power generatingcapacity from building large dams in small countries are another example In such cases the correcteconomic value of water accounts for price changes in the final output produced by the water sothat demand functions for commodities replace fixed commodity prices15 For example a drought-coping policy that increases reservoir storage or storage capacity in a major irrigated agriculturalregion like Egypt or California can reduce national prices of cotton dairy products and produce

13 Where instream flow uses compete with each other such as securing a natural variable flow pattern for endangered specieshabitat versus keeping high steady flows for stocked trout neither of these units of water use may be satisfactory In this caseusing the lsquowith and withoutrsquo principle described earlier may be required to make improved costndashbenefit decisions based oncommon denominators14 For example holding back one unit of water volume at a reservoir to prolong the recreational boating season by a month inAugust may contribute ten extra boating days for the month If boaters could be charged $10 per additional boating day thenthat acre foot contributes a marginal value of $100 as a recreational boating resource If the same added one acre foot releasedfrom the reservoir avoids $120 in costs associated with key ecological assets otherwise lost then the waterrsquos marginal value ifreleased from the reservoir and delivered to sustain the ecological asset is $12015 A demand function is a mathematical formula that summarizes how a commodityrsquos price changes with changes in thequantity of the commodity available that is produced by the irrigation water That is the price is not a constant but rather amathematical function of output


266 Physical interdependence Physical interdependence among various water uses complicatesassessments of benefits and costs of proposed programs that alter current water use patterns (Shourianet al 2008 Wang et al 2008) The typical river basin contains several alternative uses for water anyone of which may affect others through any or all of the quantity quality time and location dimen-sions16 As a general principle of valuation the benefits from a particular increment of water supplyin a given location in a river basin is the sum of the values produced in the first location and thevalue of all altered return flows in all subsequent uses locations and time periods

267 Establishing common denominators Common denominators are important for comparing typesof water use or water values in cases where there are great differences in water quality required fordifferent water uses (eg irrigation vs computer chip manufacture vs endangered species habitat vspotable urban water supply) One common denominator that permits the desired side-by-side compari-son is an equivalent quantity of lsquoraw untreated water in the streamrsquo To achieve this comparison bothtreatment and transport costs can be subtracted from the value of the water at its offstream location(eg residential tap) This comparison helps ensure a side-by-side comparison of the value of waterin competing uses where there are widely different quality requirements Modern fast computers com-bined with advanced mathematical programming software that can handle complex algebraicexpressions have facilitated the development of dynamic mathematical models of the hydrology agron-omy engineering economics and institutions associated with water interventions Many such modelscan simultaneously encompass the problemrsquos quantity time space and quality dimensions In factsome modern software (eg GAMS) allow the use of algebraic functions that express irrigation hydro-power urban recreation and ecological asset demands as explicit functions of water stocks and waterflows over waterrsquos four major dimensions (quantity quality time and location)

3 Policy debates

CBA can inform a wide range of policy debates A short list of recent contributions to the publishedresearch includes transboundary water management (Brichieri-Colombi amp Bradnock 2003) interbasintransfers (Knapp et al 2003) river regulation (Trush et al 2000) climate change (Tol 2002a b Tanakaet al 2006) wetlands improvement (Turner et al 2000) ecosystem services (Loomis et al 2000) openspaces (Luttik 2000) selected watershed services (Cai et al 2003a b Draper et al 2003) irrigation multi-functionality (Boody et al 2005) biodiversity (Edwards ampAbivardi 1998) virtual water (Chapagain et al2006) streamflow forecasts (Hamlet et al 2002) crop irrigation (Gomez-Limon amp Berbel 2000) marinebiodiversity (Turpie et al 2003) drought management institutions (Booker 1995) urban wetlands(Boyer amp Polasky 2004) wastewater reuse (Chu et al 2004) agricultural water reuse (Haruvy 1997)water conservation (Schaible 1997) lake ecosystems (CoopsampHosper 2002) improvedwater supply fore-casts (Iglesias et al 2003) aquatic ecosystems (Pattanayak 2004) cropland retirement (Yang et al 2003)irrigation water transfers or trading (Gohar amp Ward 2010) and groundwater protection (Poe amp Bishop

16 A good example is when water is stored at a high mountain reservoir to be available for urban peak power and recreation inmid-summer or to release for deliveries to a downstream key ecological asset to maintain endangered species habitat Butholding water upstream for power or habitat may reduce the quantity available for irrigation use downstream late in thegrowing season when short-run irrigation values can be several hundred dollars per acre foot to avoid a complete crop loss


1999)Despite this large enumeration ofwater policy issues that have seen recent application ofCBA severalimportant and recurrent water policy debates command special attention for economic analysis

31 Development

Water contributes to economic development (Van der Zaag 2005 Hanjra et al 2009) It is a valuedand scarce natural resource that is required for human life and essential to human health and the naturalenvironment The quality and quantity of water resources affect all levels of society from the nation tothe person A central challenge in most river basins is the development of policies that efficientlyequitably and sustainably allocate the basinrsquos water resources among competing uses across locationstime periods and political and institutional jurisdictions Projects programs laws regulationsand institutions such as water markets are increasingly being relied upon as instruments to reallocatewater among competing users (Bjornlund 2003) Without such a reallocation new developmentscannot take place and economic development opportunities will be lost to the detriment ofexisting communities Numerous basin-scale models have been developed since the 1990s thatdescribe the water supply situation along a river system and the water demands by various water-using sectors Water supply and demand are balanced based on the economic objective of maximizingNPV Results typically show major tradeoffs between the various competing uses (eg Gurluk amp Ward2009)

32 Peace

Where water is scarce competition for its uses can lead to tensions and conflict The problem is bothancient and modern Water stress can threaten national security Where this occurs economic analysishas the potential to make an important contribution to the promotion of peace in the search for policiesand programs that would ensure the availability and just distribution of clean water and sanitation Ten-sions related to water are apparent in North Africa the Middle East Central Asia and China (Bowen2009) With emerging water shortages likely to increase in the face of climate change tensions coulddevelop into armed conflict without strict agreement on fair administration of water laws treaties andagreements CBA has the potential to inform decision-makers about the capabilities of various policychoices to contribute to sustained peaceFor example shared water resources are a special source of conflict in the Jordan River basin shared

by Israel Jordan Palestine Syria and Lebanon (Mimi amp Sawalhi 2003) The control and allocation ofwater has been a special target of the ongoing peace process Negotiators could benefit from a decisiontool based upon objective criteria to reach acceptable entitlements to shared water resources by all par-ties CBA is one such tool for which water sharing arrangements could be identified by which most orall parties could receive benefits exceeding costs compared to the most likely alternative outcomes(Gruen 2000)Properly conducted the information provided by a comprehensive CBA could be a resource for pro-

moting peace in disputed transboundary rivers if the analysis takes account of water demand watersupply and a range of alternatives for developing improved infrastructure River basin-scale analysisof benefits and costs to each party could allow all parties transparent access to data assumptions andcalculations of the values and costs of alternative programs for improving or expanding watersupply CBA provides a powerful framework for the system-wide analysis of infrastructure investments


A recent study analyzing basin-scale water policy proposals concluded that the economics of seawaterdesalination and water conveyance lines could be a good substitute for continued depletion of surfaceand groundwater in the Jordan Basin (Fisher et al 2005)

33 Climate

A wide variety of regional national and international assessments of the water-related impacts of cli-mate change have been conducted over the past two decades using different methods approachesclimate models and assumptions (eg Whitehead et al 2009) Two examples are illustrated hereone for the Colorado River Basin and the other for the Sacramento River Basin Both watersheds areessential to the social economic and ecological character of their regions both are regional snow-melt-driven basins both have extensive and complex water management systems in place and bothhave seen numerous independent studies conducted to deal with old and ongoing conflicts Several sig-nificant and consistent impacts were identified for these basins across a wide range of potential climatechange scenarios One of the most important is the shift in timing of runoff that results from changes insnowfall and snowmelt These impacts have important policy implications for water management plan-ning and policy (Tanaka et al 2006) The tendency is toward integrated water resources assessmentswhere climate is one among many changes that are expected to occur (Varis et al 2004) Climatechange presents a potentially large but unknown future risk of large changes in various dimensionsof water supply and use These dimensions include streamflows evaporation and crop water use A vig-orous search therefore continues for more resilient water institutions to help smooth adaptation towhatever changes emerge by allowing the society of water users to adapt more flexibly to unexpectedchanges in future water supplies or demands

34 Poverty

Water is essential to the livelihoods of more than one sixth of the worldrsquos population living on lessthan US$1 a day especially for the 850 million rural poor engaged primarily in agriculture In manypoor countries water is a major constraint to farm output and income (Hussain amp Hanjra 2004Molden et al 2010) Better agricultural water management could contribute to poverty reductionalong several pathways First access to reliable water raises productivity improves job opportunitiesand stabilizes income (Raschid-Sally et al 2005) Second it encourages the use of non-water cropyield-enhancing resources and allows diversification into higher-income products raises off-farm out-puts and meets numerous household needs Third it can contribute to improved nutritional statushealth social justice and the environment (Namara et al 2010)Water scarcity and associated poverty presents a special problem in much of sub-Saharan Africa

Investments in agricultural water can contribute to eradicating extreme poverty and hunger and to secur-ing environmental sustainability Increased crop yields and shifts to higher valued crops can help raisethe incomes of rural households generate jobs and reduce consumer food prices These investments canalso stabilize income and employment support education and improve nutrition health and social jus-tice Investments in agricultural water development and management can reduce poverty by raisingopportunities for the poor (Hanjra amp Gichuki 2008) CBA can play an important role in informingthe best measures to reduce water poverty by accounting for the value of water in alternative usesFor agriculture the value of additional water lies in the gain in farm income that the additional water


makes possible For urban users it is the additional consumer surplus resulting from lower water pricesplus income to the supplier For the environment the marginal value of water equals the willingness topay for improvements in key ecological assets made possible by the use of that water to sustain thoseecological assets

35 Environment

Human society has used freshwater from rivers lakes groundwater and wetlands for many differenturban agricultural and industrial activities but until recently typically overlooked its value in support-ing ecosystems There is growing recognition that functionally intact and biologically complex aquaticecosystems provide many economically valuable services with considerable long-term benefits tosociety The short-term benefits include ecosystem goods and services such as food supply flood con-trol purification of wastes and habitat for plant and wildlife Long-term benefits include the sustainedprovision of these goods and services and the improved capacities of aquatic ecosystems to respond tofuture stressors like climate change Maintenance of the processes and properties that support freshwaterecosystems are increasingly included in debates over sustainable water allocation (Barton 2002)Since the 1990s much work has been conducted on the economic value of ecosystem services (eg

Martinez et al 2007 Sandhu et al 2008) The aim of much of that work is to estimate the total econ-omic value (TEV) of ecosystem change resulting from a policy Three special challenges arise whenattempting to value changes in ecosystem services

bull the interaction of ecosystem products and servicesbull uncertainty about the internal function of ecosystems andbull what those ecosystems contribute to life support functions

The debates often demonstrate how complex valuing ecosystem services can be For example a studyfrom Colorado examined five ecosystem services that could be restored along a 45-mile section of thePlatte River Households were asked a willingness to pay question regarding purchasing the increase inecosystem services through a higher water bill Results showed that households would pay an average ofUS$21 per month or US$252 annually for the additional ecosystem services resulting in a value ofUS$19 million to US$70 million (Loomis et al 2000)

36 Health

Water has major impacts on human health especially where safe drinking water or accessible sanitationare lacking A 2002 study estimated the disease burden from water sanitation and hygiene at the globallevel (Pruss et al 2002) The authors estimated the preventable disease burden to be 40 of all deathsand 57 of the total disease burden occurringworldwide accounting for diarrheal diseases schistosomia-sis trachoma ascariasis trichuriasis and hookworm disease Another study performed an economicevaluation of water disease prevention methods It estimated the costs and benefits of a range of fiveselected programs to improve water and sanitation services for several places (Hutton amp Haller 2004Haller et al 2007) Programs evaluated included (1) halving the existing proportion of people lackingaccess to improved water sources (2) halving the existing proportion of people without access to improvedwater sources and sanitation (3) providing everyone access to improved water and improved sanitation


services (4) number 3 above plus providing everyone with water disinfected at the point of use (5) pro-viding everyone access to a regulated piped water supply and sewage connection in their houses Predictedreductions in the incidence of diarrheawere calculated for each program Findings showed that all five pro-grams passed the economic efficiency test most with flying colors In developing regions the return on aUS$1 investment ranged from US$5ndash28 for all five programs CBA could play a major role in identifyingeconomic measures to reduce water-related diseases (DeRoeck et al 2005)

4 Empirical challenges

41 Benefits

411 Market transactions When water programs produce benefits that are traded in markets themarket price under some conditions can be a good measure of the programrsquos marginal benefit Thoseconditions require that there be no major externalities or unpriced rationing of the water of the sortthat occurs when an administered price is set to a level that is below the waterrsquos real scarcity If thewater user is free to purchase all water demanded at that market price then price is a good measureof the additional benefits offered by the water since the user will use the water until its marginalvalue equals its price Where market prices can be observed and measured they can be used tovalue both costs and benefits of a program The economic logic behind this principle is that the will-ingness to pay for one more unit of output supplied by a public program or one more unit of input(the marginal unit) equals the market price as long as buyers are free to buy all they want at thegoing price However many water policy proposals are large enough to affect price The incrementalbenefits accruing from a public program plan or regulation that changes the supply of market goodscannot be measured by multiplying the additional quantity of output either by the old or the newprice The former over-estimates and the latter under-estimates the incremental benefit17If the demand schedule is linear18 a simple unweighted average of prices with and without the pro-

grams can be used19 For an intermediate product (producer input) like water for crop irrigation orcommercial fisheries the demand schedule is derived from the final product (Connor 2008) It ismeasured as the product price times the inputrsquos marginal physical product It is only an accurate measureof the marginal social benefit from providing more of the resource if the price of the output (crops orfish) to which the input will be applied reflects what people actually pay for them If this condition issatisfied the gross benefit arising from a public program that supplies intermediate products is measuredby the producersrsquo change in net income

412 Non-market values Market transactions are uncommon for water resource programs Because ofthe physical institutional and economic characteristics of many water services their market prices are hard

17 What is needed is a measure of the added area under the market demand curve resulting from the added public supply aswell as the lost area under the market demand curve(s) from resources displaced by the public supply This added area is thetheoretically correct measure of the incremental benefits provided because it measures what the recipients would pay rather thango without18 That is price is a linear function of quantity supplied other things being equal19 A nonlinear demand requires finding the added area swept out beneath the demand schedule


to observe Even when markets do exist the observed price must be interpreted with care One kind ofa nonmarket water transaction occurs when the price of water is set by an administered price systemof the sort that occurs when waterrsquos use is regulated An example is an irrigation project such as themany being discussed internationally to cope with anticipated climate change and increased food demandsIrrigation water is often subject to an administered price applied to water for which quantity is limited by awater right or by varying supplies set by hydrologic conditions If the farmer is not free to adjust the use rateof water when waterrsquos price changes then the administratively set price understates the marginal benefits ofthe water Likewise in places where the price of medical care is subsidized but subject to widespread short-age the market value of reduced medical expenses is one way to value environmental programs thatimprove human health and safety (eg drinking water regulations) However this market value is likelyto be much less than the willingness to pay for health-improving environmental policies since healthcare may be priced low but rationed (Hutton et al 2007 Hunter et al 2009)

413 Mathematical programming Mathematical programming models can be used to calculate thevalue of publicly supplied program inputs Classic examples come from several studies in whichscarce water in a model constrains the actions of an income-maximizing water user such as a farmcity environmental user or even the sum of all use in a basin (eg Baranowski amp LeBoeuf 2008)One common application of this method is to compute the change in total benefits resulting fromadded amounts of publicly-supplied water The resulting shadow price is a good measure of the econ-omic value of a program that would supply the water

414 Alternative cost saved Another method for estimating benefits of a public environmental programcomes from the principle of alternative cost This principle is applied by recognizing that the upper bound ofwillingness to pay for a publicly-supplied service is the cost saved by not supplying the service need fromthe most likely economically feasible alternative The method must be used carefully because there areusually many possible alternatives including private alternatives to public projects and public alternativesto each component ofmultiple purpose programs (Zekri 2008)Many if not all alternatives might be econ-omically infeasible The technique could be applied correctly to cases in which a private alternative wouldhave been built without the public program in question A good example is the cost of added medical facili-ties that would have been supplied to serve illness without an environmental health regulation Using theprinciple of alternative cost saved the benefits of the public program are measured by the cost avoidedof the least expensive alternative The approach is attractive because in many cases lack of data ondemand makes measurement of a programrsquos benefits through estimating a demand schedule difficult orimpossible The primary advantage of the alternative cost method is that for cases in which demands arehard to find estimation of willingness to pay can be accomplished without estimating demand functions20

20 An important disadvantage of the alternative cost method is that it can be used to justify a weak program by pretending thatthere is always a more expensive method with a higher alternative cost for meeting the programrsquos objective For example onecould measure the benefits of a government program that improved water quality by claiming that the resulting water qualityimprovement saves the private sector the large amount of resources that it would have spent on achieving the same waterquality Historically in the US this method was used to justify economically weak investments in the capacity of riversystems to support additional navigation based on the private railroads that would not need to be built to haul the samefreight In fact most of the railroads had not been contemplated One way to guard against this false justification is tocount only the cost of the alternative method if there is strong evidence that it would be built without the program


415 Contingent behavior surveys Sometimes the demand for a public program must be measuredwhen no market transaction and no use occurs so that it is hard to estimate benefits A good exampleis improved wetlands in natural surroundings in which case the resource in question is a public good(Yang et al 2008) Another example is the extensive non-market benefit supplied by irrigated agricul-ture including environmental services rural livelihoods and aesthetic values (Groenfeldt 2006) Sincethe early 1980s analysts have come to rely increasingly on user surveys to derive resource value esti-mates (eg Holmes et al 2004)Two approaches are the expenditure function method and income compensation The expenditure

function relies on data in related markets where the quantity of the publicly-supplied resource is a vari-able in the demand for some private market good Under some conditions an empirical estimate of thebenefit for the publicly-supplied resource can be derived The widely-recognized travel cost method is agood example The income compensation approach is based on estimating the compensation required tooffset or in some cases to replace the proposed policy change Measuring that compensation oftendepends on a direct asking (contingent valuation) approach to estimating changes in economic surplusUsing this method consumers are directly asked about their willingness to pay for certain environmentalor natural resource improvements In some cases they are asked about their willingness to vote for ballotinitiatives in which they would be charged a percentage of the total program cost

416 Integrated assessments Integrated economic assessments of water plans especially through thedevelopment and use of basin-scale models have received considerable attention since 2000 This atten-tion has been driven largely by concerns about climate change combined with growing global demandsfor food water and power (Heinz et al 2007 Urkiaga et al 2008) These assessments attempt to bringtogether biophysical socioeconomic and geopolitical perspectives into a single CBA of water develop-ments (Dreizin et al 2008) Some researchers have shown that these models can inform conflictresolution in basins shared by many riparian countries where water scarcity is faced daily (egFisher et al 2005)

417 Use versus non-use values Use values of a water resource are values created by those who per-sonally use the resource either directly or indirectly An example of a use value produced by leavingwater in a stream is provided by anglers or swimmers Use values of water in a reservoir include benefitsfrom hydropower flood risk reduction irrigation (Mushtaq et al 2007) and water-based recreationNon-use values also called passive-use values are values that come from motivations other than per-sonal use These include preservation for future use by others gifts to future generations or maintainingoptions for future use Non-use values can be an important part of a CBA since they can be either abenefit or cost depending on the policy proposed

418 Benefits transfer Collection of the data needed to estimate benefits often requires an expensiveuser survey Especially for proposed sites or programs that do not exist there are no primary data tocollect In these situations benefits transfer involves using data on resource use at sites in one region(a surveyed region) to predict visitation and benefits at sites in a separate region for which resourceuse or benefits data are unavailable (the target region) Benefits transfer is a practical method for eval-uating management and policy impacts of environmental proposals when primary research is notpossible or cannot be justified because of budget constraints or time limits The transfer of adjusted


benefit estimates gained in one context to a different one is seen as important by many to the widerfuture development and use of CBA (Wilson amp Hoehn 2006)

42 Costs

Costs are usually easier to estimate than benefits because of the visible concrete and measurablefinancial requirements needed to incur them (Hensher et al 2005) By contrast many modern waterinterventions exist because of a perceived need to supply services whose benefits are not readily estab-lished in the marketplace21 In dealing with costs an analyst attempts to place monetary estimates onwhat is given up or the resource cost to the economy as a result of an environmental regulation oraction aimed at maintaining or improving some aspect of public well-being When inputs are usedby the project or program or other outputs are displaced by it there is a double problem First it isnecessary to adjust prices of inputs to eliminate any payments to them that exceed their opportunitycosts22 Second there is an analogous problem as seen on the benefits side As greater amounts ofan input are used in any one line of output the price of the alternative product which it might havemade (its opportunity cost) continues to rise In the same way as seen with benefits one must confrontthe choice of valuing the input at its lsquowithout policyrsquo price its lsquowith policyrsquo price or at some intermedi-ate level If we assume a linear derived demand schedule a price half-way between the old and newlevels will be a good estimateMarket prices may be poor indicators of opportunity costs or might not even exist in the case of

waters used for project sites Outdoor recreation ecosystem functions (eg Fisher et al 2008) grazingbenefits displaced by a new reservoir or all those services gained from an existing dam removed aregood examples If the site is publicly owned no outlay from a public agencyrsquos budget for its purchaseis required but unpriced recreation ecosystem function or grazing may be sacrificed Even if land for theproject is bought the high private discount rate and risk aversion of land developers may produce amarket value much different from opportunity costs Market prices of these resources may poorly reflecthow the public values such a loss One example is the damming of a geologically and aestheticallyunique canyon where a public water development program produces benefits measurable in monetaryterms including water supply recreation and hydropower

43 Time

431 Life of the policy Estimating the life of a project or program is difficult subjective and widely-debated It depends on the assessments of the programrsquos physical life technological changes shifts indemand or fashion competing products that emerge and the general state of the world many years inadvance The effect of any errors made will depend on the discount rate the higher it is the lesserrors of estimation matter However for many water programs such as large investments to support

21 Costs are hard to measure when they are unpriced benefits displaced by a program All the problems of measuring benefitsgained apply to benefits displaced by a project such as a wetland lost from a new urban water supply system22 The opportunity cost of a resource is the maximum social benefit in highest-valued use outside the project For example theopportunity cost of land flooded by a reservoir is the value of that land in its current use


adaptations to global warming estimation errors matter considerably Project life is an example of theneed for sensitivity analysis where the calculations are repeated many times for different possible valuesof the projectrsquos life Sensitivity analysis is quite important when the analystrsquos estimates of costs andbenefits are uncertain

432 The discount rate Discounting reflects the time value of money Benefits and costs are worthmore if they are experienced sooner All future benefits and costs including non-monetized benefits andcosts should be discounted The higher the discount rate the lower is the present value of future benefitsand costs23 For typical public investments in construction projects with costs concentrated in earlyperiods and benefits following later raising the discount rate tends to reduce the net present value24The correct discount rate depends on whether the benefits and costs are measured in real or nominalterms A real discount rate is adjusted to correct for the effect of anticipated inflation and should beused to discount inflation adjusted benefits and costs A real discount rate is approximated by subtract-ing expected inflation from a nominal interest rate if expected inflation is 3 and the nominal marketinterest rate is 7 then the real rate is 4 Benefits and costs incurred in future years should be assignedlower weights in decision making than those experienced currently25 The discount rate should be basedon how individuals affected by the proposed policy are willing to trade off current consumption forfuture consumption Two common methods for selecting a discount rate are the social opportunitycost of capital and the social rate of time preference However there is considerable uncertainty overthe correct discount rate Because the discount rate is so hard to identify the present value of net benefitsof a proposed policy should be computed for several possible discount rates

44 Issues affecting benefits and costs

441 Secondary effects It is unlikely that any water intervention will affect the overall long-run levelof employment In a normally-functioning economy a new investment project or environmental regu-lation yields no net benefits beyond the willingness to pay by beneficiaries minus the opportunity costof resources displaced Any income expansions from related activities termed secondary effects are

23 Outcomes of many economic evaluations of water policy interventions hinge on the discount rate In the US for exampleCongress originally established the discount rate for federal water projects politically But in more recent years the publishedUS federal discount rate for water projects tends to shadow real market interest rates When high discount rates follow highmarket interest rates less taxpayer money flows to long-term high capital intensive interventions with delayed payback Theincreased scarcity of resources for long-term projects in developing countries also lurks behind the World Bankrsquos debatesaround whether or not any positive discount rate should exist The presence of any positive discount rate presents achallenge for international treaties that could address climate change Positive discount rates discourage any single nationfrom taking the lead in mitigating climate change In addition the common property nature of measures taken to guardagainst climate change makes one pessimistic about the likelihood of any international treaties ever being signed to dealwith it One hopes that high discount rates in individual countries combined with the common property nature of aprotected climate will not continue to block nations from establishing workable enforceable international climate agreements24 This is less true for environmental regulations costs are not always concentrated in early years25 A recent study estimated rates of time preference based on choice experiments The authors found that the rate of timepreference is high for immediate benefits and drops off quickly soon after consistent with hyperbolic discounting (Viscusiet al 2008a)


likely offset by equivalent declines elsewhere However while secondary impacts of water programs areoften balanced out elsewhere in a national economy their economic and political impacts are typicallyimportant to the affected regions Much of the local political motivation for water interventions resultsfrom an attempt to capture such regional effects In many cases these secondary effects are reflected inlarge gains in land values The notion that some secondary benefits or costs should be included asbenefits or costs in a CBA has a long history for water resource programs going back to the very earliestdays of CBArsquos development by the US federal water agencies The classic question is illustrated for thecase of a proposed irrigation development project that results in increased grain production The primary(direct) benefits are measured as the value of the increase in grain output in addition to consumersurplus where the project depresses crop prices less the associated increase in farmersrsquo costs of pro-duction in the project area So the benefit is the gain in farm income plus consumer surplus wherefood prices fall Nevertheless local project supporters point out correctly the increased grain outputresults in increased economic activity by grain merchants transportation suppliers flour millsbakers retail food stores and restaurants26 So from the local view secondary benefits tend to behigh and politically important Thus where local cost shares are small the ratio of total local benefitsincluding secondary benefits to total local costs can produce benefit cost ratios exceeding 10 to 1 Fromthe national view secondary benefits are often assumed to be zero since the cost of financing the projectcauses secondary benefits to be lost where consumer or investment spending falls to finance the projectIt is for this reason that a national accounting stance in which secondary benefits are presumed to bezero is advised for projects financed by national governments

442 Inflation One important question centers on the treatment of inflation when performing a CBAThe major conclusion is that consistency is required in the treatment of prices and discount rates Inother words either real or nominal prices as well as real discount rates can be considered in makingproject assessments based on future time periods It is probably easiest to use real values ie pricesexpressed in constant dollars The alternative is forecasting the inflation rate for many years into thefuture over the long life of a water project or program ndash a daunting task

443 Risk and uncertainty Programs for which benefit and cost streams are uncertain or risky are lessattractive than those that produce equivalent expected values of benefits and costs but with less risk oruncertainty What this means is that risk and uncertainty are costs and these costs should be reflected inthe evaluation of public programs (Brouwer amp De Blois 2008) Two common approaches to reflect riskand uncertainty have been proposed conservative rules of thumb and probability analysis Rules ofthumb include measures to penalize riskier proposals Examples include reducing the programrsquos liferequiring the DNPV to exceed a minimum threshold level use of certainty equivalents establishinga cutoff period after which benefits are zero using a precautionary principle for interventions thatguard against risky outcomes like climate change inflating costs reducing benefits and attaching arisk premium to raise the discount rateOne special method is the probabilistic approach which typically assigns probabilities to uncertain out-

comes and compares the expected value of benefits with the expected value of costs in which expectations

26 Similarly a program that guards against future oil spills like the spring 2010 BP accident would increase fish populationsraise fishersrsquo incomes elevate retail fish sales and increase the number of restaurant fish dinners sold


are weighted by their probabilities of occurring The expected values of the distributions of benefits costsand net benefits can be obtained byweighting each outcome by its probability of occurrence and then sum-ming across all potential outcomes Estimates that differ from expected values such as worst-caseestimates can also be used For example studies of past activities affected by water quality regulationshave documented tendencies for costs that grow beyond initial expectations which would provide aworst case scenario that is considerably more pessimistic than forecasts of expected values

444 Sensitivity analysis The NPV indicates the overall economic performance of a project or pro-gram But as much recent work shows (eg Currie et al 2009) a huge number of assumptions go intoproducing that single calculation including the chosen discount rate time horizon of project futuretechnologies available impacts of climate change in water supplies and the like To deal with thisvery large number of assumptions sensitivity analysis tests the variability of the NPV results obtainedfrom the CBA to changes in critical assumptions It identifies those input parameters (assumptions) thathave the greatest influence on the outcome The reason for performing sensitivity analysis is that itidentifies the most sensitive input parameters so a decision can be made on whether or not it isworth spending more to get better information on that parameter It can increase the use of CBA bydecision-makers who may not want to rely on a single estimate of NPV in judging an overall programrsquoseffectiveness27

45 Alternatives to discounted NPV

Two commonly-used decision-support methods that are alternatives to CBA are cost effectivenessanalysis and environmental impact analysis Each requires less information than a CBA but the priceof the reduced information may be less useful information to inform water policy decisions

451 Cost effectiveness analysis It is common to face the challenge of having no reliable informationon benefits (eg Azad amp Ancev 2010) When benefits cannot be measured or their measurement isundesirable or prohibited by custom or law it is still possible to draw on the power of microeconomicanalysis to identify an economically efficient policy target (Wattage amp Soussan 2003) Cost effective-ness (CE) analysis looks for the lowest cost method of accomplishing a pre-determined target The ideabehind CE is to look for programs that increase a targeted output by as much as possible for a givenexpenditure of resources or to find the least expenditure of resources needed to accomplish a fixedtargeted outputA short list of recent studies on CE of water programs includes drinking water supplied (Kaldellis

et al 2004) recreational fishing days provided latrines installed (Meddings et al 2004) groundwaterremediation (Nasiri et al 2007) waste load reduction targets (Ning amp Chang 2007) and effluentpermit trading (Thompson 1999) Marginal (incremental) analysis can be an important part of CE

27 A comprehensive form of sensitivity analysis is to calculate a matrix of empirical partial derivatives showing the marginalimpact on each of N endogenous variables including discounted net present value associated with a marginal change in each ofM assumptions (parameters) When presented in elasticity form the NM tabled elasticities are independent of scale changesin either endogenous variables or parameters Examination of the matrix can be used to see which assumptions are most criticalto the calculated NPV or other endogenous variables of interest Used in this way the table can guide and prioritize the searchfor better data


The cheapest means for reaching an environmental target is achieved when the marginal cost is equal forall possible achievement measures This method of analysis has seen application by comparing alterna-tive methods for supplying safe drinking water (Kaldellis et al 2004) CE analysis can also be used toinform decision-makers on the added total costs of establishing more stringent or less stringent environ-mental regulations CE can also be used to find out how much more stringent environmental standardscan be made without increasing total costs This can be done by reallocating responsibilities among thevarious means for hitting the target so that the marginal costs are made more nearly equal when thosemarginal costs are currently far apart28

452 Impact analysis Sometimes water policy analysis must be performed when there is no infor-mation on either benefits or costs But policymakers still want to be informed on results of majoractions before making choices that could have major consequences The method of analysis thatdeals with these questions is environmental impact analysis (EIA) EIA attempts to measure impactsassociated with proposed policies Compared to CBA or CE EIA makes no effort to convert conse-quences into common denominators such as dollars of cost or benefit Because no commondenominators are attempted large amounts of raw information are placed in the lap of decision-makers and the public These people must make their own common denominator comparisons eg com-pare various kinds of program costs to the various water service improvements produced29

5 Conclusions

This paper has reviewed selected recent developments in costndashbenefit analysis for water policyresearchers who wish to understand the applications of economic principles to inform emergingwater policy debates The costndashbenefit framework was found to provide a comparison of total economicgains and losses resulting from a wide range of proposed water policies Despite the power and utility ofcostndashbenefit analysis as a tool to inform emerging water policy debates there are a number of researchchallenges that remainThe following short list of challenges face analysts who wish to draw on economic principles to better

inform modern water policy debates through CBA The list does not pretend to be comprehensive

bull droughts and floods continue unabated sometimes with large costs incurred by large numbers ofpeople who often have the lowest flexibility to adjust There is a need to identify the kind scaleand location of water developments (eg storage) and institutions that efficiently and equitablyreduce damage caused from climate fluctuations

28 An important example of CE has been developed under the label incremental-cost analysis (ICA) ICA has seen considerabledevelopment and refinement by the US Army Corps of Engineers since the 1960s The Corps has developed it to meet theirneeds for evaluating a range of interventions such as project development project operation and environmental regulations Forexample Corps planners use ICA to compare the incremental environmental outputs gained with successively more expensiveecosystem restoration plans (Orth 1994)29 Some critics of both CBA and CE see EIA as an improvement its strength lies in avoiding hidden value judgments that areproduced by common denominator comparisons


bull improvements are needed in sensitivity analysis to show impacts of assumptions on a CBAbull institutions are needed that signal the marginal cost of water use while protecting human rights forpeople who are vulnerable to floods or droughts

bull arrangements are needed that allow each riparian in a single river basin to receive some benefit fromtransboundary waters that pass through their country

bull information is needed to show when demand reduction for coping with shortages incurs a loweropportunity cost than supply expansion

bull institutions or pricing arrangements are needed that allow water providers to charge a high enoughwater price to recover costs without excluding safe drinking water from the poor

Acknowledgement

The author is grateful for financial support from the New Mexico State University Agricultural Exper-iment Station

References

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Anagnostopoulos J S amp Papantonis D E (2007) Optimal sizing of a run-of-river small hydropower plant Energy Conver-sion amp Management 48(10) 2663ndash2670

Arena C Mazzola M R amp Scordo G (2010) A simulationoptimization model for selecting infrastructure alternatives incomplex water resource systems Water Science amp Technology 61(12) 3050ndash3060

Azad M A S amp Ancev T (2010) Using ecological indices to measure economic and environmental performance of irrigatedagriculture Ecological Economics 69(8) 1731ndash1739

Baranowski T M amp LeBoeuf E J (2008) Consequence management utilizing optimization Journal of Water ResourcesPlanning amp Management-Asce 13(44) 386ndash394

Barton D N (2002) The transferability of benefit transfer contingent valuation of water quality improvements in Costa RicaEcological Economics 42(1ndash2) 147ndash164

Becu N Neef A Schreinemachers P amp Sangkapitux C (2008) Participatory computer simulation to support collectivedecision-making potential and limits of stakeholder involvement Land Use Policy 25(4) 498ndash509

Bel G amp Warner M (2008) Does privatization of solid waste and water services reduce costs A review of empirical studiesResources Conservation amp Recycling 52(12) 1337ndash1348

Birol E Koundouri P amp Kountouris Y (2010) Assessing the economic viability of alternative water resources in water-scarceregions Combining economic valuation costndashbenefit analysis and discounting Ecological Economics 69(4) 839ndash847

Bjornlund H (2003) Efficient water market mechanisms to cope with water scarcity International Journal of Water ResourcesDevelopment 19(4) 553ndash567

Boody G Vondracek B Andow D A Krinke M Westra J Zimmerman J amp Welle P (2005) Multifunctional agri-culture in the United States Bioscience 55(1) 27ndash38

Booker J F (1995) Hydrologic and economic-impacts of drought under alternative policy responses Water Resources Bul-letin 31(5) 889ndash906

Bowen W R (2009) Water engineering for the promotion of peace Desalination amp Water Treatment 1(1ndash3) 1ndash6Boyer T amp Polasky S (2004) Valuing urban wetlands a review of non-market valuation studies Wetlands 24(4) 744ndash755Brichieri-Colombi S amp Bradnock R W (2003) Geopolitics water and development in South Asia cooperative development

in the GangesndashBrahmaputra delta Geographical Journal 169(1) 43ndash64Brinegar H R ampWard F A (2009) Basin impacts of irrigation water conservation policy Ecological Economics 69(2) 414ndash426Brouwer R amp De Blois C (2008) Integrated modelling of risk and uncertainty underlying the cost and effectiveness of water

quality measures Environmental Modelling amp Software 23(7) 922ndash937


Brown P H Tullos D Tilt B Magee D amp Wolf A T (2009) Modeling the costs and benefits of dam construction from amultidisciplinary perspective Journal of Environmental Management 90 S303ndashS311

Cai X M McKinney D C amp Lasdon L S (2003a) Integrated hydrologic-agronomic-economic model for river basin man-agement Journal of Water Resources Planning amp Management-Asce 129(1) 4ndash17

Cai X M Rosegrant M W amp Ringler C (2003b) Physical and economic efficiency of water use in the river basin impli-cations for efficient water management Water Resources Research 39(1) 1013ndash1018

Cai X M Ringler C amp You J Y (2008) Substitution between water and other agricultural inputs implications for waterconservation in a River Basin context Ecological Economics 66(1) 38ndash50

Chapagain A K Hoekstra A Y amp Savenije H H G (2006) Water saving through international trade of agricultural pro-ducts Hydrology amp Earth System Sciences 10(3) 455ndash468

Chu J Y Chen J N Wang C amp Fu P (2004) Wastewater reuse potential analysis implications for Chinarsquos water resourcesmanagement Water Research 381(1) 2746ndash2756

Connor J (2008) The economics of time delayed salinity impact management in the River MurrayWater Resources Research 44W03401

Coops H amp Hosper S H (2002) Water-level management as a tool for the restoration of shallow lakes in the NetherlandsLake amp Reservoir Management 18(4) 293ndash298

Currie B Milton S J amp Steenkamp J C (2009) Costndashbenefit analysis of alien vegetation clearing for water yield and tour-ism in a mountain catchment in the Western Cape of South Africa Ecological Economics 68(10) 2574ndash2579

Dagdeviren H (2008) Waiting for miracles the commercialization of urban water services in Zambia Development amp Change39(1) 101ndash121

De Bon H Parrot L amp Moustier P (2010) Sustainable urban agriculture in developing countries A review Agronomy forSustainable Development 30(1) 21ndash32

Del Saz-Salazar S Hernandez-Sancho F amp Sala-Garrido R (2009) The social benefits of restoring water quality in the con-text of the Water Framework Directive a comparison of willingness to pay and willingness to accept Science of the TotalEnvironment 407(16) 4574ndash4583

DeRoeck D Clemens J D Nyamete A amp Mahoney R T (2005) Policymakersrsquo views regarding the introduction of new-generation vaccines against typhoid fever shigellosis and cholera in Asia Vaccine 23(21) 2762ndash2774

Diebel M W Maxted J T Nowak P J amp Vander Zanden M J (2008) Landscape planning for agricultural nonpointsource pollution reduction I a geographical allocation framework Environmental Management 42(5) 789ndash802

Dombrowsky I Almog R Becker N Feitelson E Klawitter S Lindemann S amp Mutlak N (2010) How widely appli-cable is river basin management An analysis of wastewater management in an arid transboundary case EnvironmentalManagement 45(5) 1112ndash1126

Draper A J Jenkins M W Kirby K W Lund J R amp Howitt R E (2003) Economic-engineering optimization for Cali-fornia water management Journal of Water Resources Planning amp Management-Asce 129(3) 155ndash164

Dreizin Y Tenne A amp Hoffman D (2008) Integrating large scale seawater desalination plants within Israelrsquos water supplysystem Desalination 220(1ndash3) 132ndash149

Dwight R H Fernandez L M Baker D B Semenza J C amp Olson B H (2005) Estimating the economic burden fromillnesses associated with recreational coastal water pollution ndash a case study in Orange County California Journal of Environ-mental Management 76(2) 95ndash103

Eckstein O (1958)Water-resources Development The Economics of Project Evaluation Harvard University Press CambridgeMAEdwards P J amp Abivardi C (1998) The value of biodiversity where ecology and economy blend Biological Conservation83(3) 239ndash246

Everard M (2004) Investing in sustainable catchments Science of the Total Environment 324(1ndash3) 1ndash24Fagan J E Reuter M A amp Langford K J (2010) Dynamic performance metrics to assess sustainability and cost effective-ness of integrated urban water systems Resources Conservation amp Recycling 54(10) 719ndash736

Fisher B Turner K ZylstraM Brouwer R de Groot R Farber S Ferraro P Green R Hadley D Harlow J Jefferiss PKirkby C Morling P Mowatt S Naidoo R Paavola J Strassburg B Yu D amp Balmford A (2008) Ecosystem servicesand economic theory integration for policy-relevant research Ecological Applications 18(8) 2050ndash2067

Fisher F M Huber-Lee A Amir I Arlosoroff S Eckstein Z Haddadin M J Hamati S G Jarrar A Jayyousi AShamir U amp Wesseling H (2005) Liquid Assets An Economic Approach for Water Management and Conflict Resolutionin the Middle East and Beyond ndash Resources for the Future Johns Hopkins University Press Washington DC


Gohar A A amp Ward F A (2010) Gains from expanded irrigation water trading in Egypt an integrated basin approach Eco-logical Economics 69(12) 2535ndash2548

Gomez-Limon J A amp Berbel J (2000) Multicriteria analysis of derived water demand functions a Spanish case study Agri-cultural Systems 63(1) 49ndash72

Griffin R (1998) The fundamental principles of costndashbenefit analysis Water Resources Research 34(8) 2063ndash2071Groenfeldt D (2006) Multifunctionality of agricultural water looking beyond food production and ecosystem services Irriga-

tion amp Drainage 55(1) 73ndash83Gruen G E (2000) Turkish waters source of regional conflict or catalyst for peace Water Air amp Soil Pollution 123(1ndash4)

565ndash579Guan D amp Hubacek K (2008) A new and integrated hydro-economic accounting and analytical framework for water

resources a case study for North China Journal of Environmental Management 88(4) 1300ndash1313Gupta J amp van der Zaag P (2008) Interbasin water transfers and integrated water resources management where engineering

science and politics interlock Physics amp Chemistry of the Earth 33(1ndash2) 28ndash40Gurluk S amp Ward F A (2009) Integrated basin management water and food policy options for Turkey Ecological Econ-

omic 68(10) 2666ndash2678Hall D C (2009) Politically feasible revenue sufficient and economically efficient municipal water rates Contemporary

Economic Policy 27(4) 539ndash554Haller L Hutton G amp Bartram J (2007) Estimating the costs and health benefits of water and sanitation improvements at

global level Journal of Water amp Health 5(4) 467ndash480Hamlet A F Huppert D amp Lettenmaier D P (2002) Economic value of long-lead streamflow forecasts for Columbia River

hydropower Journal of Water Resources Planning amp Management-Asce 128(2) 91ndash101Hanjra M A amp Gichuki F (2008) Investments in agricultural water management for poverty reduction in Africa case studies

of Limpopo Nile and Volta river basins Natural Resources Forum 32(3) 185ndash202Hanjra M A Ferede T amp Gutta D G (2009) Reducing poverty in sub-Saharan Africa through investments in water and

other priorities Agricultural Water Management 96(7) 1062ndash1070Harou J J Pulido-Velazquez M Rosenberg D E Medellin-Azuara J Lund J R amp Howitt R E (2009) Hydro-

economic models Concepts design applications and future prospects Journal of Hydrology 375(3ndash4) 627ndash643Haruvy N (1997) Agricultural reuse of wastewater nation-wide costndashbenefit analysis Agriculture Ecosystems amp Environment

66(2) 113ndash119Heidecke C amp Heckelei T (2010) Impacts of changing water inflow distributions on irrigation and farm income along the

Draa River in Morocco Agricultural Economics 41(2) 135ndash149Heinz I Pulido-Velazquez M Lund J R amp Andreu J (2007) Hydro-economic modeling in river basin management impli-

cations and applications for the European Water Framework Directive Water Resources Management 21(7) 1103ndash1125Henriksen H J amp Barlebo H C (2008) Reflections on the use of Bayesian belief networks for adaptive management Jour-

nal of Environmental Management 88(4) 1025ndash1036Hensher D Shore N amp Train K (2005) Householdsrsquo willingness to pay for water service attributes Environmental amp

Resource Economics 32(4) 509ndash531Hirshleifer J DeHaven J C amp Milliman J W (1960) Water Supply Economics Technology amp Policy University of

Chicago Press Chicago ILHolmes T P Bergstrom J C Huszar E Kask S B amp Orr F (2004) Contingent valuation net marginal benefits and the

scale of riparian ecosystem restoration Ecological Economics 49(1) 19ndash30Horne A Stewardson M Freebairn J amp McMahon T A (2010) Using an economic framework to inform management of

environmental entitlements River Research amp Applications 26(6) 779ndash795Hufschmidt M M (2000) Benefitndashcost analysis 1933ndash1985 Water Resource Update 110 42ndash49Huhtala A amp Marklund P O (2008) Stringency of environmental targets in animal agriculture shedding light on policy with

shadow prices European Review of Agricultural Economics 35(2) 193ndash217Hunter P R Pond K Jagals P amp Cameron J (2009) An assessment of the costs and benefits of interventions aimed at

improving rural community water supplies in developed countries Science of the Total Environment 407(12) 3681ndash3685Hussain I amp Hanjra M A (2004) Irrigation and poverty alleviation review of the empirical evidence Irrigation amp Drainage

53(1) 1ndash15


Hussein I amp Al-Jayyousi O (1999) Evaluating water-importation options in Jordan opportunities and constraints Journal ofthe Chartered Institution of Water amp Environmental Management 13(4) 245ndash249

Hutton G amp Haller L (2004) Evaluation of the Costs and Benefits of Water and Sanitation Improvements at the Global LevelWorld Health Organization (WHOSDEWSH0404) Geneva

Hutton G Haller L amp Bartram J (2007) Global costndashbenefit analysis of water supply and sanitation interventions Journalof Water amp Health 5(4) 481ndash502

Iglesias E Garrido A amp Gomez-Ramos A (2003) Evaluation of drought management in irrigated areas Agricultural Econ-omics 29(2) 211ndash229

Jeuland M amp Whittington D (2009) Costndashbenefit comparisons of investments in improved water supply and cholera vacci-nation programs Vaccine 272(3) 3109ndash3120

Kaffo C amp Fongang G (2009) Agricultural and societal importance of water on the Bamboutos mountains (Cameroon) Cah-iers Agricultures 181

Kaldellis J K Kavadias K A amp Kondili E (2004) Renewable energy desalination plants for the Greek islands technicaland economic considerations Desalination 170(2) 187ndash203

Kenney D S Goemans C Klein R Lowrey J amp Reidy K (2008) Residential water demand management lessons fromAurora Colorado Journal of the American Water Resources Association 44(1) 192ndash207

Khan S Mushtaq S amp Chen C (2010) A decision support tool for irrigation infrastructure investments Irrigation amp Drai-nage 59(4) 404ndash418

Knapp K C Weinberg M Howitt R amp Posnikoff J F (2003) Water transfers agriculture and groundwater managementA dynamic economic analysis Journal of Environmental Management 67(4) 291ndash301

Krutilla J V amp Eckstein O (1958) Multiple Purpose River Development studies in Applied Economic Analysis The JohnsHopkins University Press Baltimore MD

LaserM Larson E Dale BWang N Greene NampLynd L R (2009) Comparative analysis of efficiency environmental impactand process economics for mature biomass refining scenarios Biofuels Bioproducts amp Biorefining-Biofpr 3(2) 247ndash270

Loomis J Kent P Strange L Fausch K amp Covich A (2000) Measuring the total economic value of restoring ecosystemservices in an impaired river basin results from a contingent valuation survey Ecological Economics 33(1) 103ndash117

Luttik J (2000) The value of trees water and open space as reflected by house prices in the Netherlands Landscape amp UrbanPlanning 48(3ndash4) 161ndash167

Maass A Hufschmidt M M Dorfman R Thomas H A Marglin S A amp Fair G M (1962) Design of Water-resourceSystems Harvard University Press Cambridge MA

MacDonald A M Dochartaigh B E O Calow R C Shalabi Y Selah K amp Merrett S (2009) Mapping groundwaterdevelopment costs for the transboundary Western Aquifer Basin PalestineIsrael Hydrogeology Journal 17(7) 1579ndash1587

MacDonald D H Morrison M D amp Barnes M B (2010) Willingness to pay and willingness to accept compensation forchanges in urban water customer service standards Water Resources Management 24(12) 3145ndash3158

Mahjouri N amp Ardestani M (2010) A game theoretic approach for interbasin water resources allocation considering the waterquality issues Environmental Monitoring amp Assessment 167(1ndash4) 527ndash544

Martinez M L Intralawan A Vazquez G Perez-Maqueo O Sutton P amp Landgrave R (2007) The coasts of our worldecological economic and social importance Ecological Economics 63(2ndash3) 254ndash272

McKean R N (1958) Efficiency in Government through Systems Analysis with Emphasis on Water Resource DevelopmentJohn Wiley amp Sons New York

Meddings D R Ronald L A Marion S Pinera J F amp Oppliger A (2004) Cost effectiveness of a latrine revision pro-gramme in Kabul Afghanistan Bulletin of the World Health Organization 82(4) 281ndash289

Mimi Z A amp Sawalhi B I (2003) A decision tool for allocating the waters of the Jordan River basin between all riparianparties Water Resources Management 17(6) 447ndash461

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Molden D Oweis T Steduto P Bindraban P Hanjra M A amp Kijne J (2010) Improving agricultural water productivitybetween optimism and caution Agricultural Water Management 97(4) 528ndash535

Molle F Venot J P amp Hassan Y (2008) Irrigation in the Jordan Valley are water pricing policies overly optimistic Agri-cultural Water Management 95(4) 427ndash438


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Namara R E Hanjra M A Castillo G E Ravnborg H M Smith L amp Van Koppen B (2010) Agricultural water man-agement and poverty linkages Agricultural Water Management 97(4) 520ndash527

Nasiri F Huang G amp Fuller N (2007) Prioritizing groundwater remediation policies a fuzzy compatibility analysis decisionaid Journal of Environmental Management 82(1) 13ndash23

Ning S K amp Chang N B (2007) Watershed-based point sources permitting strategy and dynamic permit-trading analysisJournal of Environmental Management 84(4) 427ndash446

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Poe G L amp Bishop R C (1999) Valuing the incremental benefits of groundwater protection when exposure levels areknown Environmental amp Resource Economics 13(3) 341ndash367

Pruss A Kay D Fewtrell L amp Bartram J (2002) Estimating the burden of disease from water sanitation and hygiene at aglobal level Environmental Health Perspectives 110(5) 537ndash542

Ramirez O Ward F A Al-Tabini R amp Phillips R (2011) Efficient water conservation in agriculture for growing urbanwater demands in Jordan Water Policy 13(1) 102ndash124

Raschid-Sally L Carr R amp Buechler S (2005) Managing wastewater agriculture to improve livelihoods and environmentalquality in poor countries Irrigation amp Drainage 54 S11ndashS22

Rayner T S Jenkins K M amp Kingsford R T (2009) Small environmental flows drought and the role of refugia for fresh-water fish in the Macquarie Marshes arid Australia Ecohydrology 24 440ndash453

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Schreinemachers P Potchanasin C Berger T amp Roygrong S (2010) Agent-based modeling for ex ante assessment of treecrop innovations Litchis in northern Thailand Agricultural Economics 41(6) 519ndash536

Shourian M Mousavi S J amp Tahershamsi A (2008) Basin-wide water resources planning by integrating PSO algorithm ampMODSIM Water Resources Management 22(10) 1347ndash1366

Silva-Hidalgo H Martin-Dominguez I R Alarcon-Herrera M T amp Granados-Olivas A (2009) Mathematical modellingfor the integrated management of water resources in hydrological basins Water Resources Management 23(4) 721ndash730

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Tanaka S K Zhu T J Lund J R Howitt R E Jenkins M W Pulido M A Tauber M Ritzema R S amp Ferreira I C(2006) Climate warming and water management adaptation for California Climatic Change 76(3ndash4) 361ndash387

Thompson D B (1999) Beyond benefit-cost analysis institutional transaction costs and regulation of water quality NaturalResources Journal 39(3) 517ndash541

Thompson T L Pang H C amp Li Y Y (2009) The potential contribution of subsurface drip irrigation to water-saving agri-culture in the Western USA Agricultural Sciences in China 8(7) 850ndash854

Tilmant A Pinte D amp Goor Q (2008) Assessing marginal water values in multipurpose multireservoir systems via stochas-tic programming Water Resources Research 44(12) W12431

Tol R S J (2002a) Estimates of the damage costs of climate change ndash Part II Dynamic estimates Environmental amp ResourceEconomics 21(2) 135ndash160


Tol R S J (2002b) Estimates of the damage costs of climate change Part 1 Benchmark estimates Environmental ampResource Economics 21(1) 47ndash73

Torell G amp Ward F A (2010) Improved water institutions for food security and rural livelihoods in Afghanistanrsquos BalkhRiver Basin International Journal of Water Resources Development 26(4) 613ndash637

Trush W J McBain S M amp Leopold L B (2000) Attributes of an alluvial river and their relation to water policy andmanagement Proceedings of the National Academy of Sciences of the United States of America 972(2) 11858ndash11863

Turner G M Baynes T M amp McInnis B C (2010) A water accounting system for strategic water management WaterResources Management 24(3) 513ndash545

Turner R K van den Bergh J Soderqvist T Barendregt A van der Straaten J Maltby E amp van Ierland E C (2000) Eco-logical-economic analysis of wetlands scientific integration for management and policy Ecological Economics 35(1) 7ndash23

Turpie J K Heydenrych B J amp Lamberth S J (2003) Economic value of terrestrial and marine biodiversity in the CapeFloristic Region implications for defining effective and socially optimal conservation strategies Biological Conservation112(1ndash2) 233ndash251

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van der Zaag P (2005) Integrated water resources management relevant concept or irrelevant buzzword A capacity buildingand research agenda for southern Africa Physics and Chemistry of the Earth 301(1ndash16) 867ndash871

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Viscusi W K Huber J amp Bell J (2008a) Estimating discount rates for environmental quality from utility-based choiceexperiments Journal of Risk amp Uncertainty 37(2ndash3) 199ndash220

Viscusi W K Huber J amp Bell J (2008b) The economic value of water quality Environmental amp Resource Economics 41(2) 169ndash187

Wang L Z Fang L P amp Hipel K W (2008) Basin-wide cooperative water resources allocation European Journal of Oper-ational Research 190(3) 798ndash817

Ward F A amp Michelsen A M (2002) The Economic value of water in agriculture concepts and policy applications WaterPolicy 4 423ndash446

Ward F A amp Pulido-Velazquez M (2008) Efficiency equity and sustainability in a water quantity-quality optimizationmodel in the Rio Grande basin Ecological Economics 66(1) 23ndash37

Wattage P amp Soussan J (2003) Incorporating environmental value and externality in project evaluation as a sustainabilityindicator to evaluate Bangladesh water development Water Resources Management 17(6) 429ndash446

Webber M Barnett J Finlayson B amp Wang M (2008) Pricing Chinarsquos irrigation water Global Environmental Change-Human amp Policy Dimensions 18(4) 617ndash625

Wendland K J Honzak M Portela R Vitale B Rubinoff S amp Randrianarisoa J (2010) Targeting and implementingpayments for ecosystem services opportunities for bundling biodiversity conservation with carbon and water services inMadagascar Ecological Economics 69(11) 2093ndash2107

Whitehead P G Wilby R L Battarbee RW Kernan M amp Wade A J (2009) A review of the potential impacts of cli-mate change on surface water quality Hydrological Sciences Journal-Journal Des Sciences Hydrologiques 54(1) 101ndash123


Wilson M A amp Hoehn J P (2006) Valuing environmental goods and services using benefit transfer the state-of-the art andscience Ecological Economics 60(2) 335ndash342

Yang H amp Zehnder A J B (2002) Water scarcity and food import a case study for southern Mediterranean countriesWorldDevelopment 30(8) 1413ndash1430

Yang W Chang J Xu B Peng C amp Ge Y (2008) Ecosystem service value assessment for constructed wetlands a casestudy in Hangzhou China Ecological Economics 68(1ndash2) 116ndash125

Yang W H Khanna M Farnsworth R amp Onal H (2003) Integrating economic environmental and GIS modeling to targetcost effective land retirement in multiple watersheds Ecological Economics 46(2) 249ndash267

Young R A (2005) Determining the Economic Value of Water Resources for the Future Baltimore MDYoung R A amp Gray S L (1972) Economic Value of Water Concepts and Empirical Estimates Final Report to the National

Water Commission Contract NWC 70ndash028 Department of economics Colorado State University Ft Collins COYoung R A amp Haveman R H (1985) Economics of water resources a survey In Handbook of Natural Resource and

Energy Economics Kneese A V amp Sweeney J L (eds) Elsevier North-Holland Amsterdam Vol I pp 465ndash521Zagonari F (2010) Sustainable just equal and optimal groundwater management strategies to cope with climate change

insights from Brazil Water Resources Management 24(13) 3731ndash3756Zaki S amp Amin A (2009) Does basic services privatisation benefit the urban poor Some evidence from water supply pri-

vatisation in Thailand Urban Studies 46(11) 2301ndash2327Zekri S (2008) Using economic incentives and regulations to reduce seawater intrusion in the Batinah coastal area of Oman

Agricultural Water Management 95(3) 243ndash252Zhang Q F Xu Z F Shen Z H Li S Y ampWang S S (2009) The Han River watershedmanagement initiative for the South-

to-North Water Transfer project (Middle Route) of China Environmental Monitoring amp Assessment 148(1ndash4) 369ndash377

Received 7 February 2011 accepted in revised form 4 July 2011 Available online 27 September 2011


produced the lsquoGreen Bookrsquo the first attempt to define principles standards and procedures for measur-ing the benefits and costs of federal water projects The Green Book was updated in 1962 then later in1979 and 1983 The updates continue The principles standards and procedures governing the use ofCBA for federal water and environmental programs continue to see vigorous debate in the Obamaadministration1While CBA has its origins in economic feasibility studies of public water projects such as irrigation

flood control water supply and electric power projects its scope has widened since the 1970s to informthe design of laws and regulations to protect health safety and environmental values Since the mid1990s legislation proposed by the US Congress (if adopted) would have expanded the use of costndashbenefit analysis in the regulatory process Because of differences between the planning developmentand regulatory missions of the agencies who conduct CBA and risk assessment the reform legislationhas generated considerable debate and controversy Greater use of CBA to inform water policy decisionswould significantly change how government agencies develop and implement certain types of regu-lations The debates involve more questions of how intensively and to what end CBA should bepracticed than whether or not it should be CBA is already widely used by many US Federal waterand environmental agencies in assessing regulatory activities and proposed programsThe question of how economic principles can be used to identify better ways to mitigate damages

caused by extreme weather events and climate change continues to receive widespread attentionRecent record losses of life and property damage caused by floods in Asia and Australia show thatthe need for economical ways to mitigate damages continues to rise So the question of the economicvalue of programs that could limit damage from floods drought and other extreme water events con-tinues to receive international attention In addition debates continue to surround decisions on waterconservation development allocation trans-boundary water allocation and environmental improve-ments in both the developed and developing world Debates are especially intense where there iscompetition between food production energy generation key ecological assets and urban water usesToo much water too little water water at the wrong time the wrong place or of the wrong qualityall present a water problem for which policy interventions are neededIn the face of these debates people who are not specialists in the economics of water resources may

be overwhelmed by the range of benefits and costs that are claimed for various proposed water pro-grams Yet better understanding may require consultation with lengthy background sources Few

1 The following is a very short list of landmarks in the development of CBA for US federal water projects and programs (forwhich an excellent and detailed summary is presented in Hufschmidt 2000) US Flood Control Act (1936) required thatfederal flood control projects be funded only to the extent that lsquohellip the benefits to whomsoever they may accrue exceed theestimated costsrsquo Green Book Proposed Practices for Economic Analysis of River Basin Projects issued by Subcommitteeon Benefits and Costs (US Federal Interagency Committee 1950) Bureau of the Budget issues Budget Circular A-47 oneconomic principles and procedures for water resources projects (US Bureau of the Budget 1952) revised version ofGreen Book issued by Subcommittee on Evaluation Standards of the US Inter-Agency Committee on Water Resources (USInter-Agency Committee 1958) five landmark critiques of CBA published (all are great reads) Eckstein (1958) Krutilla ampEckstein (1958) McKean (1958) Hirshleifer et al (1960) and Maass et al (1962) US Presidentrsquos Water ResourcesCouncil (1962) issued Senate Document 97 US Water Resources Council (1973) issued improved planning standards forfederal water agencies The US Water Resources Council (1983) issued procedures for which the president approved theEconomic and Environmental Principles and Guidelines for Water and Related Land Resources Implementation










21 Policy goals































23 Scope of value
















25 Sources of value



















3 Policy debates





31 Development


32 Peace






33 Climate


34 Poverty





35 Environment





36 Health





41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15



































































































21 Policy goals































23 Scope of value
















25 Sources of value



















3 Policy debates





31 Development


32 Peace






33 Climate


34 Poverty





35 Environment





36 Health





41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15




























































































21 Policy goals































23 Scope of value
















25 Sources of value



















3 Policy debates





31 Development


32 Peace






33 Climate


34 Poverty





35 Environment





36 Health





41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15


















































































































23 Scope of value
















25 Sources of value



















3 Policy debates





31 Development


32 Peace






33 Climate


34 Poverty





35 Environment





36 Health





41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15











































































































23 Scope of value
















25 Sources of value



















3 Policy debates





31 Development


32 Peace






33 Climate


34 Poverty





35 Environment





36 Health





41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15



































































































23 Scope of value
















25 Sources of value



















3 Policy debates





31 Development


32 Peace






33 Climate


34 Poverty





35 Environment





36 Health





41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15




























































































23 Scope of value
















25 Sources of value



















3 Policy debates





31 Development


32 Peace






33 Climate


34 Poverty





35 Environment





36 Health





41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15




































































































25 Sources of value



















3 Policy debates





31 Development


32 Peace






33 Climate


34 Poverty





35 Environment





36 Health





41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15





























































































25 Sources of value



















3 Policy debates





31 Development


32 Peace






33 Climate


34 Poverty





35 Environment





36 Health





41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15










































































































3 Policy debates





31 Development


32 Peace






33 Climate


34 Poverty





35 Environment





36 Health





41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15



































































































3 Policy debates





31 Development


32 Peace






33 Climate


34 Poverty





35 Environment





36 Health





41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15





























































































3 Policy debates





31 Development


32 Peace






33 Climate


34 Poverty





35 Environment





36 Health





41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15




























































































31 Development


32 Peace






33 Climate


34 Poverty





35 Environment





36 Health





41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15




























































































33 Climate


34 Poverty





35 Environment





36 Health





41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15




























































































35 Environment





36 Health





41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15





























































































41 Benefits


















42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15







































































































42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15


































































































42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15




























































































42 Costs



43 Time


























5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15

















































































































5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15











































































































5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15





































































































5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15





























































































5 Conclusions










Acknowledgement


References
































































53(1) 1ndash15































































































Acknowledgement


References
































































53(1) 1ndash15










































































































































53(1) 1ndash15



















































































































53(1) 1ndash15


























































































Documents

Cost benefit and water resources policy: a survey