Undermining Demand Management with Supply Management: Moral Hazard in Israeli Water Policies

Most water managers use a mixture of both supply-side and demand-side policies, seeking to capitalize on the relative advantages of each. However, supply augmentation undertaken to avoid overdrafts can reduce the effectiveness of demand management policies if the two strategies are not carefully integrated. Such a result can stem from a type of moral hazard phenomenon by which consumers, aware of the increases in potential supply, discount the importance of conservation. This is illustrated by the case of Israel. Initial national-scale water-supply projects were followed by over-extraction, which, in turn, compelled implementation of wide-spread demand management measures to reduce consumption. With the recent advent of large-scale desalination in Israel, public perception regarding the importance of conservation has diminished and consumption has increased—this, despite periodic drought conditions and critically low levels of water reserves.