Water as an economic good : a solution, or a problem?

This paper addresses this question in three steps. First, it examines the economic analysis of different values involved in treating water as a private and public good. Then the causes of both market failure and public failure are examined. Finally, the study examines alternative ways out of the dilemma posed by these two forms of institutional failure and suggests a practical plan of action. According to the authors, many would agree that, on the level of basic need, water should be treated as a public good, but that any excess should be allocated on the basis of consumers" ability to pay. The public sector has generally failed to provide effective management, however, so the case can be made that privatization is a better solution. Privatization, however, also results in market failure because of externalities, such as how much water is consumed vs. how much is returned to the system, how returned water is changed, and seasonal changes in supply and demand, transaction costs, and property rights. Thus, while judiciously applied market tools can be expected to have benefits, in many cases the necessary and sufficient conditions, especially defined and enforced water rights, are not yet in place. The authors conclude that with such preconditions in place, irrigation should be increasingly privatized. However, pursuit of free market approaches in the absence of such preconditions may have unpredictable, and possibly negative effects.