 Economics is the study of the allocation of scarce resources  One of economics' prime advantages is addressing trade – offs among various factors  The role of economics will be to do optimal allocation among competing parties  Water is an economic good  Supply and demand concepts apply

Issues to be considered  Supply can not meet demand  Population growth will increase demand  Economic advance and development will also cause more pressure on water  Environmentally oriented demand for water have risen  Water supply is not rising due to pollution and ground water depletion

Issues to be considered  Global warming can increase demand for water due to shifts in locations  The best dam sites are already occupied  Water infrastructure is depreciating  Health concerns can boost costs  Demand for hydro power will rise as a result of increasing energy prices

Key Water Challenges  Water resources management is highly political  Solutions have to be tailored to specific, widely – varying circumstances  Overall economic reform is important and has to be taken into account  Financing Needs are huge, particularly in developing countries

Supply Enhancement Strategies  Build / enlarge dams  Drill / improve wells  Build interbasin water transfer facilities  Repair leaky infrastructure  Build desalinization plants  Reprogram reservoir operations (e.g. more storage with less flood protection)

Demand Management Strategies  Establish water-conserving plumbing codes requiring certain fixture types (such as low-flow toilets and showerheads)  Establish drought contingency plans  Ration water or constrain water use (e.g., alternate-day watering schedules)  Buy / lease / sell water rights  Raise water rates  Educate water users about conservation options

Economic Instruments  The implementation of any of these strategies involve projects  Evaluation of any project involves the application of some kind of cost-benefit analysis and an instrument to conclude  The best instrument for project evaluation is the Net Present Value (NPV)

The NPV concept  The concept is simple, input required are:  The Initial Investment  The annual cash flow  A discount Rate  Timing & life time of the project  The economic values have to be used not the financial values

Issues in Determining the Economic Values  Costs and value are two different concepts  The full value of water consists of its intrinsic value and economic value  Value & costs will differ from one case to another

Conclusion  Full cost of water must be considered including the opportunity cost  Value of water should reflect societal objectives, food security, benefits from irrigation …etc  Value & cost of water should be taken into account when setting water tariffs