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Newsletter and Technical Publications CHAPTER 5: ECONOMIC ASPECTS OF EUTROPHICATION 5.1. Introduction 5.1.2. Relevant Elements of the Chapter Estimating the Economic Value of Water To develop any kind of management schemes related for water, either as a store or as a flow, water has to be recognized as having an intrinsic and explicit economic value. The economic character of water was finally recognized, after many years of discussions at international forums and among international agencies active in water management, in the Dublin Statement, adopted at the International Conference on Water and the Environment held in January 1992. The fourth principle of the Dublin Statement asserts that water has an economic value in all its competing uses and should be recognized as an economic good. Restoring water quality of lakes and reservoirs, and/or preventing pollution leading to eutrophication or to any other kind of degradation of water, need to be examined from an economic standpoint. This requires understanding the origins of such problems to implement programmes for restoration and prevention. Water Allocation among Uses and Users Water is a component of our natural capital base. Water owners, as resource managers, make explicit decisions how they use the resource. Management decisions influence, directly or indirectly, the quantity and quality of the water resource. Many problems related to water availability and water quality stem from the non-optimal allocation of the resource among uses and users as well as of other related economic resources. Discrepancies in water allocation may arise when the interests of private and social users differ, beyond distributive considerations. Social in the sense of society as a whole. This occurs within explicit or implicit water markets or where markets do not operate at all, and should be considered when planning to restore water quality or to prevent pollution of lakes and reservoirs. The impacts of eutrophication are usually external to the individual that creates it. Water behaves as both a public good and private good, in the economic sense of the concept, and that any change on its availability, both considering quantity and quality, as a consequence of changes in use, may have important effects on how wealth is distributed. Economic Instruments for Prevention, Control and Restoration Economic instruments can comprise of a set of laws, rules and procedures with explicit environmental objectives designed to influence the allocation of resources. It is important the relative prices of products, raw materials, or other inputs, in the economy are not distorted to ensure economic agents make environmentally sound management decisions and do not contribute to increased levels of environmental degradation. Instruments include taxes, fees, charges and other similar instruments. Economic agents are then free to choose the most efficient market solution convenient for there own interests. Instruments can be designed to be complementary to other institutional objectives such as command and control direct agreements with industry to reduce emissions. The implementation of programmes based in economic instruments has not eliminated the need for standards, controls, sanctions and other forms of direct government intervention. Property right issues and the development of related markets are frequently considered among economic instruments. This is because of the obvious incidence of changes in property rights costs and prices is associated with the utilisation of the resources, and on the expected profitability of the alternative decisions faced by economic agents. However, in the case of developing countries, changes in property rights or user rights on natural resources, namely forests, soil or water, have significant political and social implications (particularly in an equity sense). Economic instruments can give rise to incentive effects, on the one hand, and to collection effects, in the other. In the first case, the instrument induces the economic agent to assume an environmentally sound behaviour; in the second case, the instrument is oriented to generate funds that will be used to fund environmental activities. Markets in Water Rights The increasing private participation in water management in many countries has brought with it as a corollary the exposure of water management to market forces and the increased application of economic principles to water allocation decisions. It has also increased the interest in directly employing prices and markets as the main tools for water allocation. It should be recognized that the introduction of water markets is an interesting approach to the problems facing water resource management. A water market is a management tool that, in theory, spreads the burden and difficulties of management among a larger population allows greater participation in management decisions and can introduce greater flexibility into management systems. However, the establishment of a water market demands new skills and new attitudes from the administration, judicial systems and water users, as well as investments in registration schemes of rights, monitoring and measurement systems, and possibly in improving water distribution and transportation systems. Markets in Emission Permits A system could be devised in which there are incentives for companies to reduce their emission levels. Under a system of tradable emission permits, the regulatory authority determines the total amount of emissions of a given pollutant allowed in a certain region, but also allows the market to allocate these emissions among the sources. To this end, a number of permits, consistent with the previously determined total emission limit, are issued and distributed to the sources, which can then be traded. The transaction of permits in the market determines its price. This approach would require that the ability to pollute be defined as a right and be transferable between companies and individuals. To provide incentives it is necessary that the beneficiaries can be identified and targeted. This can only be achieved in a well-defined and effective market. Benefit/cost Analysis When analysing initiatives for the prevention and/or control of eutrophication, both costs and benefits should be estimated. Benefit-cost analysis is a useful tool for assessing the economic effects of projects, policies or programs. Simply put, this approach entails comparing all possible benefits and costs of a given policy or management objective. The purpose is to provide a filter that would systematically eliminate projects that are deleterious to economic development. It can be applied to a spectrum of policy choices. The differentiating feature is the scope or level at which benefits and costs are determined. For instance, eutrophication can be examined at the farm level, industry level, local level, State or Provincial and Federal level. Each requires a different set of information about the benefits and costs. The costs vary greatly depending on the sources of eutrophication that are targeted and the scale. Benefits range from improved recreational benefits and higher property values to improved fish populations and reduced health risks. In high-income countries, recreational benefits are most significant. It has been said for the US that over half of the value of improved water quality is usually due to recreational values. This is unlikely to be true for developing countries where public health considerations and improved fishing conditions are possibly more important. The estimation of costs is relatively simple compared with estimating the benefits. In many cases a policy change has low costs but determining the benefits and or beneficiaries can be very difficult. This is particularly prominent when there are market failures and/or a market does not exist for the good in question. It is important to distinguish between private or individual benefits and collective benefits. Private benefits are enjoyed by one individual while collective benefits are enjoyed simultaneously by many individuals. Many of the benefits associated with improved water quality are enjoyed collectively. The collective benefits are not easily captured in markets and, accordingly, are difficult to measure. Economic Valuation of Environmental Resources Measurement of the benefits and costs for improvement of water quality is often difficult. The effects on all parties concerned have to be taken into account, which might involve studying a local region or an entire country. Some environmental goods and services are marketed and thus have prices associated with them, for example, commercial fishing. There are market-based methods for estimating costs and benefits in such cases. These methods involve tallying the payments that consumers actually make for better water, better recreational sites, more desirable fish species, or other attributes of a cleaner water body. Also, the cost savings to consumers due to fewer illnesses and lower use of water filters, for example, have to be accounted for. However, there are other values associated with improved water quality, such as aesthetic values and species diversity, which have no connections to markets. These values must be measured by experimental means, through hypothetical markets. The willingness to pay is a measure of the value people place on the particular good or service flow. Willingness to pay can be thought of as a non-market equivalent to market prices.
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