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

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

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

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

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

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

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

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

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

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