Economic Principles for Water Conservation Tariffs and Incentives

Abstract

Water conservation creates no water. It manages water and water scarcity. Water conservation shifts water and water scarcity across people, their water uses, space and time. Water is scarce when it is insufficient to satisfy all the valued uses that different people have for water. Valued uses include water for drinking, cleaning, industry, transporting waste, recreation, and sustaining environmental goods such as habitat, ecosystem and aesthetic services. Water scarcity is most obvious in droughts (Kallis, 2008), but scarcity is routine even where water appears physically abundant. Water is scarce in Chicago, Illinois, even though it lies adjacent to a lake containing more than 1,180 cubic miles of water (Ipi & Bhagwat, 2002). Conflicts between people who want water for in-situ uses such water for recreation and ecological services and people who want water to withdraw water for people, agriculture and industry are common in both humid and arid environments (World Commission on Dams, 2000). People manage water scarcity through any number of formal organizations and informal groupings. These organizations and groups are water management institutions. Legislation, law and regulation establish formal institutions. Formal institutions include municipal water agencies, water districts, corporations and local governments. Other institutions emerge informally out of customs, habits, histories and the politics of water problems. Informal institutions include urban water markets that arise in neighborhoods that are not served by a municipal network (Crane, 1994) and the patterns of priorities, rights and expectations that guide irrigation in traditional societies (Ostrom, 1990). Legislation and law often intervene to recognize, modify and transform informal institutions into formal ones (cf. Coman, 2011). Different institutions have different effects on water conservation. Within one irrigation district, farmers may face ‘use-it-or-lose-it’ rules. Use-it-or-lose-it rules force farmers to use their water seasonal allocations in a given year or forfeit the unused portion (Spangler, 2004). In another district, rules may be set up so that farmers may leave unused allotments in a reservoir and stored for future use. The two irrigation districts may have the same consequences under normal conditions. When a prolonged drought occurs, farmers in the first district may watch their crops shrivel from water scarcity, while farmers in the second district draw on their banked water and enjoy a normal crop year. Rules, fees, restrictions and institutional policies make some actions beneficial and others relatively costly. The relative benefits and costs of different actions are economic incentives.