Developing Water Markets

For years, water has been a heavily subsidised commodity. In the United States, for instance, farmers in desert regions of California have received water at unrealistically low prices for decades. A small number of these farmers, in fact, have controlled as much as 80% of the state’s water supply. This pattern of subsidised water use has been repeated in countries worldwide, for different groups within the population. A new economic scheme for water is becoming prevalent in many countries, as for the first time, governments and people are realising that water itself is a commodity with a real market value.

Water has been traditionally viewed as an inexhaustible resource that should be available to everyone at little or no charge. However, this view is changing with demand outstripping supply wherever it is treated as a “free” good. A recent study by Johns Hopkins University predicts that, under current water management, 35% of the world’s population will run short of water in the next 25 years. With the impending water shortages countries are looking for new and innovative ways to manage this valuable resource. Most experts agree that the opportunities for expanding traditional water sources such as groundwater and reservoir storage is limited due to rising environmental and economic costs. For example, in some parts of the world, the cost of tapping new groundwater supplies has tripled as a result of aquifers being drawn down. The draw down is also causing pollution problems, further driving up the cost of treating water. With limited supplies of fresh water, some users are turning to desalinisation to meet the rising demands. Even with recent technological advances, desalinisation still comes with a hefty price tag.

With the high cost of development limiting expansion of water supply, the growing demand for water will be kept in check by higher prices and supplies to meet the demand will have to come from reallocating water from current uses. Neither of these has occurred because prices and allocation have been determined in the political arena. In that setting, powerful interest groups have prevented any meaningful increases in water prices or reallocations.

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