Hellegers, P.J.G.J.

English

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Treating Water in Irrigated Agriculture as an Economic Good

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Treating Water in Irrigated Agriculture as an Economic Good 
 
Paper for the workshop The Economics of Water and Agriculture in Rehovot, Israel, December 18-20, 2002. 
 
Dr. Ir. Petra J.G.J. Hellegers, Agricultural Economics Research Institute (LEI), P.O. Box 29703, 2502 LS The 
Hague, The Netherlands, E-mail: p.j.g.j.hellegers@lei.wag-ur.nl, Phone: 31 317 482295, Fax: 31 317 482745. 
 
Key words: economic efficiency, social equity, sustainability, demand management, policy instruments 
 
Abstract In recent years there has been a growing interest in the idea of treating water as an 
economic good, as highlighted at several conferences. There is, however, a lot of confusion 
about the meaning and social consequences of treating water in irrigated agriculture as an 
economic good. The main aim of this paper is therefore to clarify this. To achieve this aim 
the difference between the price, value and costs of water will be explained.  
 
Treating water as an economic good means that decisions about water use and allocation 
among users have to be based on socio-economic trade-off analysis. It related to making the 
right choices on the basis of various criteria. It is important to note that the economic 
efficient allocation is not necessary the social optimum one, since other criteria like social 
equity may play a role. Goals other than economic efficiency are often guiding principles.  
 
This is completely different from water pricing (charging), which can be used as a policy 
instrument for demand management and cost recovery. It is important to distinguish clearly 
between valuing and charging for water. Insight into the value of water in alternative uses is 
important for making the right choices about optimal use and allocation of water as a scarce 
resource. Charging for water is applying an economic instrument for demand management.  
 
Water pricing does, however, not always function very well and is politically sensitive, since 
irrigation may reduce food costs and support development in rural areas. These kinds of 
social concerns explain why the government sometimes subsidises those uses of water that 
have a high social value, but low ability to pay. It is therefore a challenge to identify the right 
balance between water treated as an economic and social good. Especially for irrigated 
agriculture, which faces high opportunity costs if there is competition from urban use, while 
the ability to pay for water for irrigation purposes is often very low. 
 
Water pricing is, however, only one of the various possible policy instruments that can be 
used for demand management. The advantages and disadvantages of various alternative 
policy instruments are discussed in the paper. It becomes clear that well-defined water rights 
are important and that a mixture of policy instruments (used simultaneously) can be fruitful.  


Treating Water in Irrigated Agriculture as an Economic Good

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