The Economics of Managing Scarce Water Resources

Recent events, news articles in the popular press, and research outside the field of economics have raised alarming questions about the sufficiency of global freshwater supplies and the potentially devastating impacts of current and future water shortages. For example, the 2008 Beijing Olympics drew attention to the problems of pollution and water shortages in China, where massive infrastructure projects are planned to address water scarcity in a country that holds 7 percent of the world’s water supply but 20 percent of its people. High-profile droughts in the U.S. Southwest and Southeast, two of the country’s fastest-growing regions, have focused attention on the issue of scarce water supplies in the United States. In many parts of the world, annual water use regularly exceeds annual surface water streamflow and is maintained only by depleting groundwater sources, so-called groundwater “mining” (Gibbons 1986). In India, for example, groundwater supplies are being rapidly depleted for agricultural irrigation, drinking water, and industrial use. Climate change may affect both the long-term availability and the short-term variability of water resources in many regions. Potential regional impacts of climate change could include increased frequency and magnitude of droughts and floods, and long-term changes in mean renewable water supplies through changes in precipitation, temperature, humidity, wind intensity, duration of accumulated snowpack, nature and extent of vegetation, soil moisture, and runoff (Solomon et al. 2007). Behavioral changes associated with climate change, such as changes in demand for heating and cooling, will also affect water scarcity. While economists have studied water resource management for many decades, they have responded in a nonalarmist fashion to the concerns raised above about water scarcity. Perhaps economists have responded in this way because these concerns remind us of debates in the 1970s about the limits to growth posed by nonrenewable energy and mineral resources, in which economists’ disagreement with those in other disciplines boiled down to the failure