Water could be arguably be the most controversial resource on the planet. It is the life source of empires, cities, and life itself. Without water, life would not exist on this planet. However, misuse of this resource, from an economic standpoint, has been very common. The United States has some of the best water policies in the world, which in turn, has provided some of the cleanest drinking water and high environmental quality. Environmental economics begs the question, at what point do benefits outweigh the costs of environmental quality. Speaking for water policies in particular, there have been many projects in the past pertaining to water such as the Three Gorges Dam in China, the Catskill Watershed in New York, and Colorado River. These projects have come under many social and political pressures because the effect it will have on water policies. Water policies have differed from amount being rerouted, the quality of the water, and environmental quality from usage of water. Environmental economics stands at understanding the benefits and costs of each project. The valuation of water is not easy, as it changes constantly, and calculating future marginal benefits from projects such as listed above comes to if the market will fail, or become to a point where it is efficient. Not only does water have a huge effect on socially, economically water policy is a sensitive issue as a public good, private good, and common property.
There have been many articles, books, and journals written about how water is treated economically as a resource, and majority of it is not good. Much of it explains how water is polluted and quality lowered because of human usage. In article titled, “Water for Life. Water Management and Environmental Policy.” It briefly details a book in which explain how the history of water policies and management has played an influential role in biodiversity, social policies, environmental health, human health, and agriculture. It combines an economic and environmental standpoint outside of social institutions.
As a common good, water policy stands out as it is shared ownership by many, for example a lakeside neighborhood. What is the price they are willing to pay for higher environmental and water quality? A cabin on a lakeside costs much more than one that is a lot further away. The benefit of living close means more visits to the lake. To explain it in different terms, what is the most efficient distance away from the lake, where it isn’t too far so the benefits still outweigh the cost. As the marginal costs rises the closer to the lake you are, the marginal benefits received will be lower and be outweighed by cost, as the price becomes higher. On the topic of common property, the valuation of having the water quality and policy is how much the residents are willing to spend for higher water quality. If their water is not up to par, at what cost is it socially and privately efficient to where the marginal benefits are greater or equal to the marginal cost. Since it is privately owned, marginal cost is lower than if it was a public good, when it is a social marginal cost. The benefits extend much further for privately owned goods; therefore the cost can go much further before it outweighs the benefits received. The Hedonic pricing method is the reason for higher pricing in residences closer to the water shore. According to the pricing method, things such as water quality and quantity determine the value and cost of distance. The further away it is, the more it will cost to get there, the closer you are the lower the cost, but the benefits are lower since the number of visits will increase. There is an area of efficiency where it is beneficial to be a certain point away and a certain point close by.
Water as a public good is a different story. Take for example, the waters and rivers in India. These water systems are open to the public and are used by everyone for things such as bathing, industrial waste, and laundry. The water policy is questioning the quality of the water and possible market failure. Water as a public good carries much burden as it cumulative effects flow downstream. One could say that the benefits of living more upriver can still outweigh the costs, just like in the analysis of water as a common good. Since in India, water in the river is a public good, therefore there is non-rivalry and non-exclusion. There is little regulation on public use of the river and quality of the rivers is being lowered. The market failure could occur when the social marginal cost is larger than the social marginal benefit. There are externalities involved when if the water policies are governmentally regulated and controlled. A downfall is that the resource will no longer be a public good because it will include exclude some and create rivalry. If a market failure occurs because of inefficiency, government or private regulation will be required in order to bring the market back to efficient levels. If this occurs, there are positive externalities from the higher quality of water. For example, once the resource becomes exclusive, there could be a higher quality of life, better living conditions, and healthier citizens. The cost-benefit valuation of projects for raising the water quality could require more cost from the people, thus raising taxes to fund a water policy. Take the Three Gorges Dam in China for example. In order to create more energy for the country, the water policy required relocation of millions of citizens from rising water levels, huge government funding, agriculture replacements, and social change. Did the People’s Republic of China consider these externalities to create a cheap energy source? Did the net benefits outweigh the costs of the project and will the benefits outweigh the costs in the future? A valuation analysis of this huge industrial project could economically create a market failure if the estimated net costs are greater than the net benefits received.
As China continues to surge as an economic superpower, the United States has had its share of water policy issues. Geoffrey Heal explains a story of a policy in New York called the Catskill Watershed. At one point, this watershed contained some of the cleanest water in the US, where it was even sold to other areas. However, pollution and unregulated use created an issue in the water quality. New York was forced to reconsider their water policy of the watershed. In the end, it was decided to clean up and repair the watershed in efforts to restore the water quality that was lost. A cost-benefit analysis suggested that it was more beneficial to repair the watershed rather than change water sources. The current environmental quality was not efficient as the cost of maintaining and received from the watershed was larger than the benefits being received from the watershed from when the water quality was much higher. The purposed environmental quality and water policy increased the marginal cost for a short period, but the net benefits would increase and become positive as the watershed was repaired. This is one example of when water policy can change the benefits and market value of water as a resource when well managed.
Social institutions, such as government and corporations, have water policies and laws to regulate quality and usage. The private marginal cost of regulating these water resources must not outweigh the marginal benefits received or a market failure will occur. An efficient level must be reached where it can benefit the public as well as provide benefits for the social institution. One benefit of regulation from a social institution is higher quality of the resource, but there is a cost induced from receiving the benefits. In order to the social institution to maintain the level of quality, the people who wish to receive the benefits must pay a cost. These costs can be incurred with things such as taxes or fees, to pay for water quality. There is a question of how much water quality is too much. Take ecotourism for example. A consumer has to decide how much they are willing to pay for their tourist destination. The price they are willing to pay can determine how much water quality a privately owned source is willing to offer. If there is too much of the resource, the product is undervalued and the cost is higher. Social institutions are forced to evaluate the quantity of the quality of water. When a consumer wants to visit, say for example, Lake Superior, do they want to stay closer for a higher price, or further away because it is cheaper? The ability to fund a water policy requires a level of cost in which it is stable. Say that the quality of Lake Superior is extremely high; therefore the cost of having such a high level of quality is also high. The benefits received will not be enough to cover the cost of maintaining the high level of quality since a cost is incurred. Therefore the maintenance is lowered so the cost is lowered to a point with the cost is covered and benefits is equal or greater than cost. This is a question that social institutions must evaluate when determining if a project should continue, be reevaluated, or stopped for water quality such as the Catskill Watershed. For government, cost can be covered in different way, such as taxation. Therefore, the cost is covered by the people. On the other hand, businesses must incur other costs in question. They must be careful in valuation of the water for things like ecotourism such as distance. The property will be more expensive the closer they are to the tourist site. If the cost decreases, but the water quality increases, this is called a cost benefit.
Water policy also effects project valuations. The point being determined is if it is better to receive the largest benefits first or later. Economists would say it is better to receive benefits sooner than later, for the very reason that the net benefits received early on can go towards other things rather than having to wait or having a stable amount of net benefits received. Water policy determines how much is to be used. Water is a durable good and offers a flow of services such as energy. The damming of the Colorado River is one of those services. To allow for cheaper energy and rerouting of the river, the water policy was evaluated and the decision was made to dam parts of the river to create cheaper energy. The best use of action is the most immediate with the least impact on the water quality. The idea was to receive the most net benefits first, then over time, let it lower. Places such as Las Vegas heavily benefit from this as the city requires massive amounts of energy and water. The externalities of city growth were extremely beneficial, but the negative was at the cost of environmental quality. The wildlife of the river was significantly decreased due to the use and human impact of the use of the river.
The use of laws by the governing body helps regulate and enforce water policies that are in place. From an economic stand point, the policies set in place regulate the market value of water. Things such as pollution and maintenance are regulated in the US by the Environmental Protection Agency (EPA). This government funded body maintains and evaluates the quality of the environment including the resource of water. The cost of funding this part of the US government is covered by taxes. The main point of this office in government is to avoid costs of things relating to environmental quality. It performs an economic analysis of environmental resources within the US to avoid costs to and incur cost benefits. The use of water for ecotourism and industrial uses is a policy aspect the EPA investigates. If the government wants to use a water resource, the EPA will do study the resource and possible future effects. This relates economically as it will avoid costs of environmental quality without changing the benefits received, thus being economically beneficial. The costs avoided from water quality could be things such as pollution regulation, water usage, and quality maintenance. It also preserves water as a resource so an extent as it protects its wildlife and the surrounding area if required. Avoiding costs increases efficiency for market value of water. The EPA is not a perfect governing body though. Sometimes decisions take a long time and projects can also be costly. They EPA are given a percentage of the US governments budget by taxation. This is not always enough, and the EPA is forced to make decisions on what type of projects to start. Water is particularly a tricky resource since it is heavily relied upon in the market, especially in industry and energy. The cost of doing these projects has to be efficient and beneficial for current environmental qualities and purposed quality. From an economic view, the EPA is beneficial, but funding it is costly. So far, the net benefits received from the EPA are positive, but as the population grows and the demand for water increases, the supply needs to be evaluated especially with quality in mind.
Water is a highly sought after resource around the world. Slowly, but surely, it is becoming less of a public good and more privatized and regulated. Since water cost will only rise in the near future, as population increases, the demand will increase and supply will decrease as is the story for every finite resource on the Earth. The ability to evaluate the economic impact on water is huge. Governing bodies and set policies for water quality and quantity will be essential. Water as a public good is increasingly becoming a market failure as more people use it without paying the cost in less developed nations. However, in growing nations such as China and India, more privatized use of the river is not always beneficial compared to the cost of externalities such as environmental quality. The economic value of water is related to the environmental quality as well. Without a policy in place from organizations such as the EPA, costs can’t be avoided, therefore lowering efficiency of the market. If there is too much supply, the resource is undervalued and could induce a market failure as well.
Water policies and quality are an economic resource that requires much regulation and laws. As a durable good, it needs to maintain a flow of service by people who make the decision of use. Even as a common property, the price and costs of water as a commodity are taken into consideration. Water as a public good will eventually disappear as the market efficiency decreases and privatization or regulation will take its place, especially in place like India and China, where their industrial revolution is heavily powered by their natural resources. The cost-benefit analysis of water policies in the market has so many aspects for water as a resource. It is odd that an essential element for life is used so carelessly, and the cost will only increase and benefits from using it as other sources other than life will slowly decrease. In the end, water policies will continue to change as benefits change and costs change as well.
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