Keywords

1.1 Introduction

Water is the nature, the arch, the originating principle; water is the beginning of all things.

(Thales)

Sustainable Development Goal 6: Ensure availability and sustainable management of water and sanitation for all.

(United Nations (2015), Agenda 2030)

Water is not only the beginning of all things, as the old Greeks had already realized, but without water, no life on earth is possible, and clean water is also a precondition for any form of sustainable development. There is enough available freshwater on earth (about 91,000 km\(^3\)) to supply every individual on earth (about 7.5 billion in 2020) approx. 12,000 l, more than enough to live decently. However, due to natural and man-made idiosyncracies, clean freshwater and sanitation (which we do not cover in-depth in this book) are scarce, and thus decisions need to be taken on the production, treatment, and distribution of water, given underlying technical and socioeconomic conditions. Water needs to be managed efficiently, both with respect to the growing scarcity of resources, as a natural endowment that is indispensable for the survival of mankind, but also with respect to the variety of eco-services it delivers. In fact, water is a multifunctional resource that provides people with potable water, secures landscapes in different climate zones and functions as a sink of pollutants emanating from human activities. Thus, a comprehensive approach is required, including a technical understanding of the basic hydrological principles, different economic allocation rules, but also the institutional framing of the use of water.

Problems of water supply and demand are not new; on the contrary, they exist as long as life exists on earth. However, with rising population, environmental challenges, climate change, and adverse local conditions, and often a lack of appropriate regulatory and institutional conditions, issues of water management have become global in the last century. This has lead—amongst other goals—to the Millennium Goals of 2000, calling to halve, by 2015, the proportion of the population without sustainable access to safe drinking water and basic sanitation. Some, but not sufficient progress was made on this path, so that the successor document, the United Nations’ (2015) Agenda 2030, recalls and even enhances the request, to “ensure availability and sustainable management of water and sanitation for all” by 2030; this is the Sustainable Development Goal 6 (SDG 6). But how to fulfill these requirements, given the challenges of water management?

The application of economic concepts is sometimes criticized in the (noneconomist) water community, but we believe that economics can provide useful insights. In the practical world of water, “there is a sense that economic concepts are inadequate to the task at hand, a feeling that water has value in ways that economists fail to account for, and a concern that this could impede the formulation of effective approaches for solving the water crisis” (Hanemann 2006, 61). In other words, water is too important to be left to economists. Yet, on the other hand, there are hundreds (if not thousands) of water, environmental, resource, agricultural, and other economists out there that do excellent analytical and practical work on water issues, and most of them go beyond the pure neoclassical ivory tower analysis that is sometimes full-mouthy criticized. To bridge the gap between different disciplines requires an interdisciplinary approach that respects the complexity of water: It can be a private good and a public good, is extremely mobile, very capital intensive, chemically complex, etc., after all, perhaps the most complex of all goods.

This book addresses rules and institutions of water scarcity. While the book’s main contribution is the application of economic concepts, we deploy an interdisciplinary technical-economic approach. This introductory chapter provides an overview of the topics covered in the book and also defines a thread to structure the multitude of issues addressed in the various chapters. The next section provides an overview of existing literature on water economics. Section 1.3 explains the technical-economic approach of this book, followed by an outline of the topics of each chapter (Sect. 1.4). In Sect. 1.5 we provide a list of important issues that we were not able to cover in this book, and the chapter ends with acknowledgments.

1.2 State of the Literature and the Specifics of Our Approach

Water resource management is covered by a breadth of literature (economic, technical, cultural, geographic, etc.). Klaver (2012) puts water in a cultural context, and Wittfogel (1981), describes the development of the hydraulic civilization. A comprehensive account of the environmental history of water is provided by Juuti et al. (2007). Let’s also recognize the “Berliner” Alexander von Humboldt, who, two centuries ago, has focussed on the water cycle in his trip to Latin America: On the way to Caripe as part of his trip through Venezuela, he observed the immense deforestation with

perhaps one of the main reasons for the drought and the drying up of the springs in the province of Neu-Andalusia. Forests (plants) produce not only water, give a large newly generated mass of water through their evaporation in the air, they do not only beat down, because they excite cold, water from the air and multiply the fog, but they are mainly charitable in that they prevent the evaporation of water masses fallen by periodic rain showers by providing shade. This evaporation is incomprehensibly fast here, where the sun is so high.Footnote 1

Among the scholarly textbooks, water is part of the (important) literature on environmental and resource economics. As such, it is featured in textbooks such as Tietenberg (2005). Water is treated as an example of a renewable resource, yet the more technical aspects, such as the hydrological cycle, or issues of water quality are not extensively covered. In addition, there are some comprehensive textbooks on water economics: The introductory textbook by Griffin (2016), deals with both, basic economic concepts and their application to water resource management problems. Shaw (2007), requires some prior microeconomic knowledge, and focusses on the North American water sector; allocative questions are prioritized, while distributional and access issues are not really covered. The classical text by Hirshleifer et al. (1969), can be considered an interdisciplinary benchmark in the literature. These textbooks require some microeconomic background, and we suggest Perman (2011), as a useful and resource-oriented reference.

A third type of references are handbooks of water economics or volumes covering research contributions on the frontier of current research, amongst Dinar and Schwabe (2015), Jordan et al. (2012), Anand (2010), and Pashardes et al. (2002). Issues covered by all these volumes include pricing, consumption, and different regulatory and institutional designs. At this point, let us also mention some of the academic journals focussing on water issues, such as Water Resources Research, Water Policy, Water Economics and Management, Water, and the Journal of Water Resources Planning and Management. We will pick up more specific references on specific issues as we go through the chapters of this book.

1.3 A Novel Technical-Economic Approach

Why another book? We feel that the synergies from a technical-economic approach to the analysis of water have not been fully reaped. Water has distinct technical, economic, and institutional features that need to be considered jointly, but that economic tools can be usefully applied to the water sector, too: These include decisions on the allocation of production, distribution, pricing issues and investment, as well as sustainability issues, the so-called triad of sustainability economics.

While the purely “economical” use of water has been addressed by various textbooks, and advanced texts are also available, a comprehensive treatment of the interplay between the hydrological cycle and the rules and institutions that govern today’s water allocation rules is still missing. Therefore, the main endeavor of the textbook is to present a modern perspective, by combining hydrological issues (such as blue and green water, water quality, groundwater flows, river flows, etc.) with a “modern” economic approach. In this context, the adjective “modern” refers to an approach that includes distributional issues and issues of enforceability of human rights in managing water resources, instead of restricting the analysis to solely technical efficiency planning methods or the adoption of purely economic optimality criteria, e.g., the Pareto-principle. With increasing scarcity, issues of the appropriate allocation of economic goods take on an ethical dimension, which is not covered by the efficiency criterion.

The approach is based on microeconomic theory applied to the real world of water, with real technologies, thus developing a truly technical-economic approach. We assume some basic knowledge of microeconomics and try to go further in the analysis of water-specific issues. In addition to gaining more in-depth insights into the technical-economic interface, this approach also allows for more nuanced policy conclusions, which builds the second pillar of this book. Ever since the UN development goals were established, we know that the management of water is not only a matter of demand and supply but also a result from a holistic policy approach comprising constitutional aspects of the human right to water and the political governance of the water cycle as a multifunctional system that secures human livelihood. Thus, we also include an analysis of the institutional framework of water management.

Our approach also combines the technical fundamentals of the hydrological cycle and different economic approaches to resolve fundamental issues of water scarcity with an in-depth assessment of the political dimension of water management and its institutional embeddedness, such as water rights, and different approaches to water tariffs, water markets, and transboundary water management; the latter are provided through a series of case studies. Thus, the book addresses both, i/ advanced undergraduates majoring in economics, and graduate students of social sciences, engineering, natural sciences, water management, etc. (with basic knowledge of microeconomics), and ii/ practitioners, consultants, economic experts, project managers, etc., in the field of water management, interested in a deeper understanding of current-day issues and options to handle these issues conceptually. The book is thus conceived as a bridge between purely economic analysis of water, and the practical work in the field, often constrained by very concrete questions. We feel that there is a need out there, and in the university and college classrooms, too, to update and extend the technical-economic exchange, as water management issues, sometimes called water crisis, linger on.

1.4 Structure of This Book

After this introduction, each chapter covers a specific topic related to water issues. Chapter 2 provides the physical and hydrological basics of water. This includes definitions of different categories of water, such as sweet and salt water, and the differentiation into “blue” and “green” water. The chapter also discusses precipitation, interception, and evapotranspiration, and the potential impact of human activities on the water cycle.

Chapter 3 covers economic, technical, and institutional challenges of Integrated Water Resource Management (IWRM). In addition to a basic technical-economic model of IWRM, we discuss water management issues of a common pool resource and derive conclusions for water policy. The chapter also includes some basic economic analysis of social welfare, distribution, and the value of water, eco-hydrology and the management of water as a public good, water recycling, groundwater management, water quality, and two further IWRM issues: Water allocation along rivers, and inter-basin water transfers.

Chapter 4 covers simple and more complex issues of water tariffication. This includes the definition of the criteria for water pricing, tariff design, and variations thereof. An important issue discussed is the objective function, e.g., whether one aims at welfare maximization, at universal service provision, or the simple survival of the poorest parts of the population. In addition to the comparison of stylized water tariffs, such as single- and two-part tariffs, the chapter also goes into more details on increasing block tariffs, and pricing in physically unconnected water markets. Last but not least, the chapter introduces two ways to deal with very rough scarcity: pricing and rationing.

Chapter 5 addresses a broad range of questions regarding the regulation and institutional design of water markets, including reference to the few empirical cases where these markets were established. The chapter first sets out institutional, hydrological, and infrastructural preconditions for establishing water markets. Then a simple model of a water market along a river basin is developed, that provides insights into alternative pricing mechanisms, such as locational or uniform prices. We report the experience of a water market experiment in Australia, the Murray-Darling basin. The chapter ends with a discussion of water entitlements and water allocation.

Chapter 6 extends the discussion to transboundary water resource management. There are 276 international river basins worldwide that stretch over two or more countries, and about 40 percent of the world population lives in these international river basins. The first section sets the scene and describes existing transboundary water agreements and principles of international water rights. A basic model is set up to analyze benefits sharing along a river basin with two riparians first, and then extended to more than two riparians, in the context of cooperative game theory. A separate section introduces bankruptcy rules for water allocation, i.e., the physical allocation of water to consumers. In addition, rules for flexible water sharing are derived. The chapter includes two case studies on transboundary water issues along the Nile and the Euphrates.

1.5 Important Topics Not Covered

Due to constraints of time and space, we had to leave out some issues that are nonetheless important (and that we plan to pick up for the second edition of this textbook...). Amongst them are climate-related issues of water scarcity, the occurrence of floods, heavy rainfall and weather-related storm surges and their impacts on the infrastructure of an economy, and on urban water management. Water infrastructure for mega-cities is a mega subject, with respect to the use of land, infrastructure financing, and organizational models. In that context, different types of sanitation infrastructure need to be compared, for urban and rural areas, including adapted technologies that can be implemented relatively quickly, such as decentralized toilet systems. In some cases, these can be cheaper than the centralized infrastructure.

Last but not least, the theory-policy nexus needs more in-depth analysis. In fact, the microeconomic approach, even appended by distributional considerations, is a tool for analysis that can not take into account issues of implementation, of institutional regimes, and conflicting interests beyond those covered in simple models. Take the example of integrated water resources management, which can be operationalized in microeconomics and especially in welfare theory by means of optimization approaches. However, in practice, this approach should be pursued with caution if it is not to lead to technocratic malfunctioning. This comprehensive approach seems utopian in its generality and it requires reference to social and economic reality if it is not itself involved in the social process of concrete water policy. From historical science, we know that the institutional development is a process of self-organization and represents a circular process between ideas and actions. It is then like the successful effort of Baron Munchausen in the novel by Erich RaspeFootnote 2 who successfully pulled himself and his horse out of the swamp by dragging himself up by his own hair. Combining the evolutionary approach with the institutional economic approach of identifying policy options and policy gaps is left to be developed, in the realm of institutional water policy analysis of Ostrom (1990), Biswas (2004), Menard et al. (2018), and many others.