Economic Concept Paper

Quang Vu
ECO 270
Dec 07, 2012
Economic Concept
Economic theory about water
In our life, water is the most important supply that influence to every activity in our life every day. Therefore in the economic illustration I think water has economic value only when its supply is scarce relative to its demand. Whenever water is available in unlimited supply, it is free in the economic sense. Scarce water takes on economic value because many users compete for its use. In a market system, economic values of water, defined by its price, serve as a guide to allocate water among alternative uses, potentially directing water and its complementary resources into uses in which they yield the greatest total economic return. In dry places, economic and
population growth create situations where water is economically scarce. In these places, water institutions, laws, projects, policies, and programs are designed to provide for maximum benefits from the use of scarce water. Not only is water itself scarce, but money, manpower, and other resources required to develop, allocate, transport, and purify water are scarce.
Competing claims for money and other resources and the economic and political difficulty of increasing taxes to pay for water programs constrain the resources available for water programs. While the political process always determines which programs are undertaken, there is also a need for more general economic standards by which competing water policies and programs can be gauged. The economic principles underlying water policy decisions rest on the ideas of benefit and cost. For example, releasing water from a dam to increase stream flow by 100 cubic feet per second may add 100 units of endangered species habitat, which, for example, might be worth $3 each. The benefit of this policy will 100x$3=$300. According to the basic rule of benefit maximization, in which increasing the total value of scarce resources is presumed desirable, this action should be undertaken if its cost is less than or equal to $300. All the additional costs resulting from a proposed action are its marginal costs, and the extra benefits are its marginal benefits. If enacted policies are limited to those that increase economic efficiency, a water
program will only be implemented if its marginal benefits equal or exceed marginal costs.
An important aim of water use in dry places can be stated in terms of maximization of the product or revenue obtained from that water use. What is to be maximized is the social benefit from the water used and not the quantity of water used itself. The economic concept also base on the economic value of water comes from the many uses to which water can be put in satisfying people’s needs. Water can have a very high economic value because it is scarce and because it is capable of being applied to many different uses. As a consumer good in ordinary households, water is needed first to drink, then for cooking, then for toilets and bathing, then for cleaning things like clothes and dishes, next for washing cars and driveways, and finally, in dry regions, for landscape irrigation. In the summertime in
dry regions, by far the largest use of water in households is for outdoor irrigation.
Market price of water in economic concept
Market prices for water offer an opportunity to observe water’s economic value directly. Nevertheless, where market transactions are recorded, analysts should use this price with care to avoid misinterpretation. There are several types of market transactions in water. Permanent water rights transactions occur in many dry places. These transactions must be interpreted carefully since land to which the right pertains is often involved in the transaction, so the market value of the water right includes water, land, and facilities. The observed transaction price of unrestricted transfers between similar water right users is the correct measure of the long- term private value of the water used for that purpose.
Finally I think water is the most important supply that we need to live. I believe that there is no life without water, no economic production, no environment. There is no human activity that does not depend on water. It is a vital resource.

SOURCE: www.agecon.nmsu.edu http://en.wikipedia.org/wiki/Economic_water_scarcity