The economic valuation of water : Principles and methods

Starting from the point of view already held by most academics that water should be regarded as an economic good, this report outlines the principles underlying the analysis of the economic value of water. The distinctive roles of positive economics and normative economics in dealing with the concept of value are stated. Some useful concepts for coping with the topic of economic valuation of natural resources in general are addressed, such as willingness to pay, consumer surplus, producer surplus, demand and supply curves, and market goods value. The value of goods and services derived from water as a natural asset is divided into use value and non­use value. The implications of regarding water as an economic commodity, and consequently of valuing it adequately, are noted. Thus, it is shown why proper economic valuation is an instrument -among others- that can assist in planning an efficient allocation of water, through the application of two simple but sound economic principles for resource allocation: that of equimarginal value and that of marginal cost pricing. Finally, a kind of typology of different methods currently available for valuing water is presented, in which the methods are classified in three categories, depending on how the values are inferred: from the observation of water markets, from the derived demand for water ( water as an intermediate good), or from direct consumer demand ( water as a final good)