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III. Water policies and demand management

Institutions and water policy
Water allocation systems
Preserving water quality

To help select the most appropriate policy option or programme alternative, policy analysts divide the water sector into supply-side and demand-side components. The supply-side approach is structure-oriented; investments in water projects are combined with engineering and technical expertise to capture, store and deliver water and to make systems operate effectively. The supply side focuses on providing water and related services.

For most of the twentieth century, policy-makers have focused their attention on the supply side. Economists have evaluated public water supply and policy options through benefit-cost analysis (BCA). The main purpose of BCA is to assure that scarce resources (such as labour, capital, natural resources and management) are all employed to their best advantage. BCA attempts to quantify the advantages and disadvantages to society of alternative policies or actions in terms of a common monetary unit.28

28 See footnote 21.
With new water-related problems arising in many parts of the world, policy-makers are increasingly emphasizing non-structural approaches to water management. A non-structural approach encompasses demand management, scientific research, education and persuasion to coordinate how humans use water. These demand-side policies attempt to address the human causes of water problems such as water quality degradation, overexploitation of aquifers and the decreasing availability of water flows to meet non-consumptive water uses (hydroelectric power, pollution assimilation and fish and wildlife habitats).

In part, this user-focused approach entails coordinating and influencing people through organizations and institutions. This focus on water users aims to promote least-cost, environmentally sound water planning and takes both demand and supply options into account. Voluntary associations, government bureaucracies and private businesses are examples of organizations that operate on both the demand (user) side and the supply (delivery) side of water supply systems. On the supply side, large hierarchical organizations usually control the capture, storage, conveyance and distribution of surface water. Demand-side organizations, for example water user associations, are established to represent the interests of irrigators and to introduce and enforce water allocation rules.

This section examines how water institutions and water allocation systems incorporate a user-focused approach to address surface water, groundwater and water quality issues related to agriculture.

Institutions and water policy

Institutions are defined more broadly than simply government agencies and private organizations. Institutions are "...sets of ordered relationships among people which define their rights, exposure to rights of others, privileges and responsibilities".29 In this context, institutions set the "rules of the game" within which the economic system operates. For example, the property rights system is considered a water institution because it includes provisions which determine access to water and land. The property rights structure helps define the incentives, disincentives, rules, rights and duties (including informal customs and formal legal systems) that guide human activities and encourage conformist behaviour.30 Thus, property rights are part of an institutional arrangement governing economic activities including water use.

29 A.A. Schmid. 1987. Property, power and public choice, 2nd ed. New York, Praeger.

30 D.W. Bromley. 1989. Economic interests and institutions: the conceptual foundations of public policy. New York, Blackwell.

Many demand-side policies attempt to coordinate water use through institutions such as property rights and incentive structures such as prices. Altering the institutional system of permissions, restrictions, incentives and penalties can compel consumers to do what they might not otherwise do. For instance, financial inducements (monetary rewards and penalties) can encourage people to use water in a more socially desirable way.

Two factors significantly influence the form of water institutions in a society: the relative scarcity of water and the transactions costs required to establish and enforce water rights. While scarcity is both supply- and demand-dependent, the human pressures on the demand side are probably the most important. Transactions costs include the resources required to obtain information, negotiate agreements on property rights and police these agreements. Water supply and demand characteristics make transactions costs for water relatively high and the value of water relatively low compared with other resources or commodities.

Many economists are trying to find ways to improve water-use efficiency through improved institutional performance. Research to date suggests that institutions and technological change are altered in response to the same types of incentives.31 When water is plentiful relative to demand, laws governing water use tend to be simple and enforced only casually. Where water is scarce, more elaborate institutional systems evolve. Higher population and income levels as well as technological advances are prompting many governments to establish formal water-use and water quality management systems.

31 V.W. Ruttan. 1978. Induced institutional change. In H.P. Binswanger and V.W. Ruttan, eds. Induced innovation. Baltimore, The Johns Hopkins University Press.
Establishing an institutional structure for allocating water is a fundamental role of social policy for any nation. The choice of structure is ultimately a compromise between the physical nature of the resource, human reactions to policies and competing social objectives. Not surprisingly, different cultures make tradeoffs based on the relative importance of their particular objectives. Countries try various means to balance economic efficiency (obtaining the highest value of output from a given resource base) and fairness (assuring equal treatment).32 Individual freedom, equity, popular participation, local control and orderly conflict resolution are other important objectives which societies must juggle when choosing a structure for water allocation.33
32 P. Bohm and C.F. Russell. 1985. Comparative analysis of policy instruments. In A.V. Kneese and J.L. Sweeney, eds. Handbook of natural resources and energy economics, Vol. I. Amsterdam, Elsevier Science Publishers.

33 See D.A. Stone. 1988. Policy paradox and political reason. Glenview, Illinois, USA, Scott, Foresman; and A. Maass and R.L. Anderson. 1978. ... and the desert shall rejoice: conflict, growth and justice in arid environments. Cambridge, MA, Massachusetts Institute of Technology Press.

Water allocation systems

Property rights systems and surface water allocation
Prices and surface water allocation
Coordinating groundwater extraction
Conjunctive groundwater and surface water management

In an "ideal" market-based water allocation system, entitlements (water rights) are well defined, enforced and transferable and they confront users with the full social cost of their actions. This type of market-dependent institutional arrangement requires security, flexibility and certainty.34 Security refers to protection against legal, physical and tenure uncertainties.

34 S.V. Ciriacy-Wantrup. 1967. Water economics: relation to law and policy. In R.E. dark, ed. Waters and water rights: a treatise on the law of waters and related problems, Vols I-VII. Indianapolis, Allen Smith.
The assumption is that users will undertake profitable long-term investments to obtain and use water supplies only if water entitlements are reasonably secure.

A system is flexible if allocations between users, uses, regions and sectors can be changed at a low cost in relation to benefits. Flexibility implies that changes in demand are accommodated easily by reallocating water to higher-valued uses as they emerge. Certainty is also necessary: water-use rules must be easy to discover and to understand.

The three basic types of "water rights" systems are: i) riparian - only those owning the land in physical contact with a natural watercourse have a right to use it; ii) prior appropriation - based on beneficial and actual use; and iii) public administration - a public authority authorizes water distribution and use. Prior appropriation and public administration are the most common systems in use throughout the world.

Property rights systems and surface water allocation

Some water allocation systems are relatively decentralized and based on entitlements or rights to specific quantities of water. Examples of these types of system are found in the western United States and southern Australia. In contrast, France uses a more centralized public utility model of water allocation (see Box 15). Chile is the only country with a comprehensive water allocation system that establishes tradeable property rights.35

35M.W. Rosegrant and H.P. Binswanger. 1993. Markets in tradeable water rights: potential for efficiency gains in developing country irrigation. Washington, DC, IFPRI.
Chile's water law: allows trade between and among economic sectors; protects third party rights; establishes compulsory water user associations and a national water authority to resolve conflicts; and allows for judiciary solutions to those conflicts not resolved by water user organizations or the water authority.36 Water transfers require authorization at two levels - those of the local water user associations and the national water authority.
36 R. Gazmuri. 1992. Chilean water policy experience. Paper presented at the World Bank's Ninth Annual Irrigation and Drainage Seminar, Annapolis, Maryland, USA.
While formal tradeable water rights systems have not been established in other developing countries, Rosegrant and Binswanger37 document the expansion in surface water and groundwater markets. One recent study on surface water trade in Pakistan reported active markets in 70 percent of watercourses.38
37 See footnote 35.
38 See footnote 35.

BOX 15

France's model for allocating water could be termed a "public utility" model. Administration is centred in six river basin committees (RBCs) and six river basin financial agencies (AFBs) which control water abstraction, treatment and delivery. The RBCs are the centre for negotiations and policy-making regarding water management at the basin level. The AFBs base action plans on extensive water data (quality and quantity needs) and are the centre of knowledge and technical expertise for the government and other interested water users. The RBCs collect fees, award grants and loans, develop long-term plans, collect and analyse water data, conduct studies and finance research.

The RBCs approve 20- or 25-year water development plans and, every five years, establish action plans to improve water quality. They also set two fees to be paid by water users: one for water consumption and the other for point source pollution. The fees provide incentives for users and also form a fund to encourage better water use through grants or soft loans. The RBCs include representatives from national, regional and local government administrations as well as individuals from industrial, agricultural and urban interests.

Those withdrawing water outside the authority (excluding small units) must measure and pay for it. Costs depend on the source (surface or ground) and how valuable it is in the specific basin. This approach also employs the "polluter pays" principle. While pollution assimilation is recognized as a legitimate water use, the entity causing pollution must pay for the costs of remediating the pollution and must compensate for any damages. Reports indicate that the system is self-financing and that it has performed well over 25 years.

The French approach provides feasible and apparently effective solutions to the major concerns about public water management: water scarcity, pollution and conjunctive use of ground and surface water.

It does, however, appear to rely more on centralized administrative discretion and less on the preferences and initiatives of private individuals. For example, water charges are set without regard for scarcity values based on bids and offers by users.

Source: World Bank. 1993. Water resources management: a policy paper.
The water allocation system in the western United States originated last century and evolved out of the customs of miners and farmers.39 This system is called the "prior appropriation" doctrine because water entitlements are granted according to the date on which a person applies the water to a beneficial use. The phrase "first in time, first in right" describes the basic principle, as the date of appropriation establishes the order in which users may draw from the water source.
39 D. Getches. 1990. Water law in a nutshell, 2nd ed. St Paul, Minnesota, West Publishing.
In the western United States system, the individual's property interest in water is limited to the right to divert and use a specified quantity. Private individuals cannot "own" water but have "usufructuary" rights. The state retains ownership and determines which uses are beneficial. Beneficial uses were originally limited to private sector, off-stream purposes in agriculture, households and industry. More recently, in-stream uses for recreation and for fish and wildlife habitats are being recognized.

Water rights are generally tied to a specific parcel of land. However, in most states these water rights can be sold, without loss of priority, to another individual for use on another parcel. Rights are protected by the state from other appropriators and cannot be taken from an individual by the government without just compensation for the foregone economic value.40

40 R.A. Young. 1986. Why are there so few transactions among water users? Am. J. Agric. Econ., 68:1143-1151.
In the prior appropriation system, irrigation water rights are administered by private non-profit cooperative organizations or by public districts, under the supervision of the state government. Financing requirements and cost recovery are normally based on area served rather than on a strict volumetric pricing system. Early in the history of western irrigation, private capital was the main source of funds. In the twentieth century, private financing has mostly been replaced by federal subsidies. In contrast, municipal and industrial water supplies are typically financed by the users, with a full-cost pricing rule.

In recent years, southern Australian states have begun to allocate water through a system of transferable water entitlements.41 The Australian water law is based on a non-priority permit system under state control and ownership. Individuals obtain a right to use water through a licence issued by a state agency; this right is usually for a specified type of use on a designated tract of land. In contrast to the United States doctrine of prior appropriation, all users share equally in supply shortfalls and permits expire after a specified time period. Recent studies indicate the need to base permits on the water system's capacity in proportion to the quantities assigned in the original permit.42

41 J.J. Pigram. 1992. Transferable water entitlements in Australia. Centre for Water Policy Research, University of New England, Armidale, New South Wales, Australia.

42 N.J. Dudley and W.F. Musgrave. 1988. Capacity sharing of water reservoirs. Water Resour. Res., 24: 649-658.

In southern Australia, the transfer of rights is generally limited to water users in the same watershed, with special conditions imposed to protect supply reliability and to prevent third-party damages. Reports evaluating water market performance highlight two points: first, the system is facilitating reallocation from low-value to higher-value uses; and, second, transferable entitlements should be considered as part of a broad package of decentralized decision-making for the entire water sector.43
43 For an extended discussion, see K.D. Frederick. 1993. Balancing water demand with supplies: the role of management in a world of scarcity. Technical Paper No. 189. Washington, DC, World Bank.

Prices and surface water allocation

In practice, market forces rarely establish prices for water. Instead, prices are set by publicly owned supply agencies or regulated private utilities. Water prices ("rates" in public utility jargon) have an impact on both efficiency and equity as well as influencing agency revenues. The charging scheme for recovering costs and allocating water is a decision variable for the supplying or regulating agency.

Rate-setting can be evaluated within a multiple objective framework in which allocative efficiency, equity of income distribution and fairness in apportioning costs all play a role in evaluating pricing policies. The secondary criteria of simplicity, administrative feasibility and stability are also taken into account.

The most commonly employed pricing policy for water is a flat rate charge, designed primarily to recover costs. Flat rates are not set according to the volume received, although a proxy for volume usually provides the basis for the charge. In agriculture, the most frequent basis for a water charge or service fee is the area irrigated. For residential use in the industrialized world, flat rate charges have been based on the number of residents, the number of rooms, the number and type of water-using fixtures or measures of property value.

Flat rates are criticized because they do not include incentives for rationing water in line with willingness to pay. Such schemes are, however, simple to administer and assure the supplier adequate revenue. The high cost of installing and monitoring meters is suggested as being the main reason for continuing the flat rate approach. This argument is convincing in cases where water is plentiful, supply costs are low and managers doubt the rationing effects of volumetric pricing. In other cases, water managers are turning to volumetric pricing to address water scarcity problems and the high costs of developing new supplies. Box 16 presents evidence from developing countries that pricing does indeed restrict water use.

Policy-makers who are primarily interested in allocative efficiency (maximizing net social product) as the goal for a pricing scheme advocate marginal cost pricing. The marginal cost represents the incremental cost of supplying a good or service. The marginal cost is a schedule of costs related to quantity and typically rises as further increments are supplied. When water prices are set at the marginal cost, rational consumers demand additional water only as long as willingness to pay (demand) exceeds the incremental costs. In theory, marginal cost pricing yields the most economically efficient allocation.

BOX 16

In Australia, Canada, Israel, the United Kingdom and the United States, studies have demonstrated that water demand drops by 3 to 7 percent when prices charged to households rise by 10 percent. While it is difficult to measure elasticity of demand without metering consumption, some research in developing countries indicates how prices, combined with other policy efforts, affect water use.


In Beijing a water quota and high rates for exceeding it led to a 37 percent reduction in industrial water use in the 1980s. During the same period, the industrial sector was able to expand rapidly.


A fertilizer plant at Goa reduced water consumption by 50 percent in response to higher water prices. The Goa plant now uses 10.3 m3 to produce 1 tonne of nutrient, paying $0.12 per m3. In contrast, a similar plant at Kanpur pays $0.01 per m3 but uses 24.35 m3 per tonne of nutrient.


In Bogor a water tariff increase ranging from 200 to 300 percent (from $0.15 to $0.42 for the first 30 m3 per month) decreased monthly consumption by around 30 percent for domestic and commercial connections.

Source: R. Bhatia and M. Falkenmark. 1992. Water resource policies and the urban poor: innovative approaches and policy imperatives. Background paper for the ICWE, Dublin, Ireland.
A number of obstacles are encountered in the application of marginal cost pricing. One problem is the variety of definitions of the appropriate marginal cost concept, particularly whether to use a short-run (variable cost) concept or a long-run, full-cost approach. A long debate ensued from the "short-run marginal cost" pricing proposal which emerged from welfare economists' work in the 1930s. For example, Coase44 strongly objected to setting utility prices at short-run marginal costs, especially where marginal costs are below average costs (thereby incurring a deficit and requiring a public subsidy). Coase also criticized the absence of a market test to determine whether users are willing to pay the full cost of supplying the commodity; the redistribution of income to favour users of decreasing-cost industrial products; and the impetus towards centralization of the economy.
44 R. Coase. 1971. The theory of public utility pricing and its applications. Bell J. Econ., 1:113-128.
Most of these criticisms can be dealt with by a multipart pricing system: the first part sets marginal price equal to marginal cost while the second part levies an assessment to recover those costs that exceed marginal costs. Even so, multipart schedules often fail to reflect the economic concept of opportunity costs correctly, focusing instead on recovering historical or embedded costs. The relevant opportunity costs include both the cost of securing incremental supplies of water and the value of water in alternative uses.45 Opportunity costs should be determined after adjusting prices to allow for distortions brought about by government interventions in pursuit of other objectives. In economic jargon, "shadow prices" must be used.46
45 G.M. Meier. 1983. Pricing policy for development management. EDI Series in Economic Development. Baltimore, The Johns Hopkins University Press.

46 L. Small and I. Carruthers. 1991. Farmer-financed irrigation. Cambridge, UK, Cambridge University Press.

The average cost pricing principle calls for recovering all costs by charging for each unit according to the average cost of providing all units. It is simple and easy to understand, as well as fair and equitable. Beneficiaries pay only the resource costs incurred on their behalf. The desired signals to users are provided, although not in as precise a way as with multipart pricing. Here, too, often only historical costs, not opportunity costs, serve as the basis for calculating average costs.

The ability-to-pay principle rests heavily on the equity criterion. Water charges are dependent on income or wealth rather than on costs. This principle is the most common basis for setting irrigation rates throughout the world and is also regularly applied to village water supplies in developing countries. Economists who view water as a commodity tend to be critical of the ability-to-pay approach. Since charges bear little relation to costs, no allocative test of willingness to pay is provided. This ability-to-pay concept is inherently subjective and political pressures frequently influence the formula in ways that distribute wealth from taxpayers to water users.

In many places throughout the world, water is scarce enough to justify the tangible and intangible costs of establishing formal pricing systems. Flat rates could satisfy cost repayment requirements in the absence of serious shortages. However, when the signals of water scarcity are absent, pressures arise for structural solutions (more construction to capture, store and deliver water) to satisfy incorrectly perceived water "needs".

The inevitability of scarce water supplies suggests the eventual adoption of multipart rate schemes that reflect the real or opportunity costs of water and other resources required for service provision. The literature describing the most desirable form for water markets and the literature dealing with water pricing have converged on the notion of a pricing system that reflects the opportunity cost of water via the mechanism of transferable water entitlements.47

47 See, for example, R.K. Sampath. 1992. Issues in irrigation pricing in developing countries. World Dev., 20(7): 967-977; and A. Randall. 1981. Property entitlements and pricing policies for a maturing water economy. Aust. J. Agric. Econ., 25: 195-212.

Coordinating groundwater extraction

Groundwater is an extremely important resource for many developing countries, including Bangladesh, India, Pakistan and the entire Near East region. In India, tube wells accounted for nearly one-half of the net irrigated area by the late 1980s.48 Because it deals with the complex interaction between society and the physical environment, aquifer management presents a formidable problem of policy design. Two types of collective policy decisions must be addressed in the management or regulation of overexploited aquifers. For one type, termed "managing the water", decisions are based on: i) the appropriate annual rate of pumping; ii) the geographic distribution of pumping; and iii) whether water supplies are augmented and/or the aquifer artificially recharged. The other type of policy decision, "coordinating the pumpers", determines: i) the institutions and policies that divide the extraction rate among potential individual users and user classes and that influence pumper behaviour; and ii) how rules for limiting pumping are monitored and enforced.

48 P. Crosson and J.R. Anderson. 1992. Resources and global food prospects. World Bank Technical Paper No. 184. Washington, DC, World Bank.
The three broad types of institutional arrangement for managing aquifers are prices and charges, quantity-based controls and exchangeable permits.

Prices and charges to control pumping. Charging pumpers is one potential method of achieving economically efficient extraction rates. An appropriately scaled charge or tax confronts pumpers with both the foregone user cost and the external cost (from increased pumping costs) imposed on neighbouring pumpers. This type of water charge internalizes user costs and external costs and achieves an optimal extraction rate.

In aquifer management, this approach takes care of one important difficulty - pumpers impose costs on themselves (that is, the external costs are reciprocal). The reduction in water use resulting from a tax would be at the expense of redistributing rents to the taxing authority, thus lowering the net income of the aquifer exploiters.

Quantity-based controls. Quantity-based control mechanisms range from simple well permits to exchangeable pumping entitlements. Well and pump permits grant the right to install and operate a well of a particular capacity. Irrigation permits frequently specify the lands on which well water can be used, thereby restricting the transport of water to other sites.

To protect existing pumpers, permits for new wells may restrict locations. For example, the state of Colorado in the United States identifies "designated groundwater basins" (for aquifers with limited natural recharge) in which new well permits must meet specific criteria - no more than 40 percent of stocks may be exhausted within a three-mile radius over a 25-year period. In most cases, well permits do not set limits on the quantity of water pumped. The economic limitations imposed by pumping costs and crop prices are assumed to be sufficient to inhibit excessive withdrawals.

Permits with appropriate size and spacing specifications can slow extraction rates. They are relatively easy to monitor and are reasonably palatable to pumpers who strongly reject more stringent regulatory devices. On the other hand, permits are most effective before problems have become severe and complex - in cases when preventing new wells and pumps solves the problem or when pumped water is not exported away from the area overlying the aquifer. In more serious cases, where all existing users must reduce annual extractions, regulating rates of withdrawals must be considered.

A pumping "quota" is a more precise quantity control mechanism. The quota specifies a fixed annual rate of extraction for each water user. The initial quantity might be assigned in proportion to use in a base period (although such an approach might set off a pumping race to establish initial rights) or be based on the proportion of land that is owned overlying the aquifer. The technology for metering withdrawals is neither complex nor expensive so, if the pumpers are willing to be metered, regulatory monitoring and enforcement need not be difficult. In principle, pumping quotas are no different from conventional surface water rights, which entitle owners to fixed shares of each year's available flow.

Anecdotal evidence suggests that farmers who have previously enjoyed an unregulated aquifer believe they are entitled to unlimited withdrawals for use on lands overlying the aquifer. They are frequently reluctant to submit to metering and the meters, once installed, are reportedly subject to high rates of unexplained "breakdowns".

Very small wells for livestock or individual households could be exempted from the permit and quota system. At moderate levels of overdraft, the cost of monitoring every small pump set might outweigh gains from reduced pumping. Also, for income distribution reasons, policy-makers may not want to restrain smallholders.

Transferable pumping entitlements. When a fixed quota is too inflexible in the face of changing water stocks and demand conditions, transferable pumping entitlements are an alternative. The pumping entitlement can be divided into two parts: one component may provide a claim to the stock of water and the other to the annual recharge. Both claims may vary from year to year, with allotments set by the groundwater authority. Annual rights to the basic stock would vary according to current and anticipated economic and hydrological conditions (including energy and commodity prices, interest rates and the remaining stock of groundwater). Rights to the natural recharge and return flows from human uses could be set to reflect a moving average of estimated recharge in recent years.

The transferability of entitlements promotes economic efficiency over the long term, permitting a reallocation to higher-valued uses as economic conditions change. Transferable rights are also consistent with local control criteria and require minimal interference with individual freedom to operate a farm or business enterprise.

One recent study suggests that tradeable rights and water markets for groundwater appear to be increasing in India, where as much as one-half of the gross area irrigated by tube wells involves purchased water.49 Box 17 provides an additional example, explaining how agricultural water sellers operate in Bangladesh.

49 See footnote 35.
In groundwater management, the quantity-based approaches appear to be preferable to pumping charges. They can yield economically efficient solutions with simpler monitoring and enforcement burdens, while avoiding the redistributive implications of taxes or subsidies. While some new outside controls on pumping are required, they need not be any more repressive than property rights for other resources or commodities.

Conjunctive groundwater and surface water management

Joint management of interrelated stream-aquifer systems is called conjunctive ground-surface water management. Aquifers interrelated with flowing streams frequently present both distinct management opportunities and problems. Unrestricted access to groundwater may reduce the water available to those holding rights to streamflows.

In the state of Colorado in the United States, a problem arose two decades ago for irrigators in the South Platte basin. Groundwater exploitation reduced streamflow, but by only a small fraction of the amount pumped. The most obvious option - placing the pumpers into the existing surface water rights system while protecting those holding existing rights to surface water - would have sacrificed most of the substantial economic benefits of exploiting the aquifer.

After several methods had been experimented, a solution was found based on markets for existing rights to surface water. In the event of a shortage, groundwater users could replace the portion of streamflows taken by pumping the aquifer. They could also replace water by purchasing and delivering rights to reservoir water. Young, Daubert and Morel-Seytoux50 demonstrated that this decentralized approach is economically superior to the alternative of forcing pumpers into the surface water rights system. The ready availability of substitute water supplies and the existence of flexible water transfer institutions are necessary to implement a solution of this type. Numerous opportunities for this market-based approach do exist, however, in the large alluvial basins of the Indus and Ganges-Brahmaputra.

50 R.A. Young, J.T. Daubert and H.J. Morel-Seytoux. 1986. Evaluating institutional alternatives for managing an interrelated stream-aquifer system. Am. J. Agric. Econ., 68:787-791.

Preserving water quality

Human production and consumption activities generate pollution by extracting and processing raw materials into consumer goods. Some wastes (residuals) from the production process are returned to the environment (e.g. waste chemicals from petroleum refineries discharged to rivers). Similarly, households return unwanted by-products of consumption activities to the environment - to sewers, to the air or to sites receiving solid waste. The materials balance principle, derived from basic laws of physics regarding the conservation of matter, asserts that, over the long term, the mass of residuals discharged to the environment must equal the mass of materials originally extracted from the environment to make consumption goods. The environment's importance as an assimilator of residuals is equal to its importance as a source of materials.51

51 For further discussion see D.W. Pearce and R.K. Turner. 1990. Economics of natural resources and the environment, Chapter 2. Baltimore, The Johns Hopkins University Press.

BOX 17

One does not have to be a landowner or even a farmer to benefit from irrigation. Irrigation increases employment and provides the landless with opportunities to work on farms or in upstream or downstream activities. In Bangladesh irrigation has also opened profitable new avenues for the landless by enabling them to exploit and sell water. The "water sellers" are organized with the help of PROSHIKA, one of a number of NGOs that aim to develop an irrigation service for farmers by tapping the abundant groundwater which underlies much of Bangladesh.

Fresh groundwater is a widespread resource but is usually present in small amounts, only sufficient to service household needs. However, in the great alluvial basins such as the Nile, the Indus and the Ganges-Brahmaputra, the alluvium may be 100 m or more deep and 10 or even 20 percent of its volume may be freshwater. The vast reserve of groundwater is recharged annually by floods, canal and field seepage and rainfall infiltration.

Groundwater is particularly valuable because it is available consistently and, unlike surface reservoirs, evaporation losses are minimal. Where surface canal supplies are also available, and provide a more or less constant base supply, groundwater can be used conjunctively to satisfy the peak demands of crops. In addition, groundwater is usually available close to farms and is more under the control of farmers.

In rural Bangladesh more than 50 percent of the population is landless or has less than 1.2 ha of land. Providing the poor access to productive resources such as water is clearly important. The PROSHIKA experience was based on organizing landless groups, using credit effectively to purchase mobile pumping equipment and providing a reliable service to farmers and share-tenants.

The water sellers targeted their service in areas where farmers had very small scattered plots of land and irrigated their fields from shallow low-cost boreholes, using portable diesel pump sets. The farmers pay the sellers in crop share, cash or, occasionally, a fixed amount in kind.

The success of the PROSHIKA mission depended primarily on access to credit (which PROSHIKA helped to organize) as well as skills training and technical support relating to agriculture, management, literacy, health and group solidarity.

The water sellers: improved water-use efficiency and equity by improving the direct access of small farmers who are usually tail-enders in other systems of irrigation; benefited from the more equitable distribution of productive assets between those with and those without landholdings; created additional employment within and outside the group as a consequence of more productive agriculture; obtained cash to buy more food and promote commercial agriculture; participated in the developing water market, which has prevented richer peasants or landlords becoming monopoly "waterlords"; and showed that the poor can be creditworthy without land as collateral.

The PROSHIKA experience is being replicated throughout Bangladesh and has many lessons that may serve for other developing countries.

Source: G.E. Wood, R. Palmer-Jones, Q.F. Ahmed, M.A.S. Mandal and S.C. Dutta. 1990. The water sellers: a cooperative venture by the rural poor. West Hartford, Connecticut, Kumarian Press.
One important policy implication of the materials balance principle is that residuals must end up somewhere, either as mass or energy. The management of discharges into watercourses must be integrated with waste disposal into the atmosphere and landfills. Reducing the amount of waste discharged into water may not solve society's overall problem if the waste is sent elsewhere, such as into the atmosphere by burning or to a land site by dumping.

There are two types of water pollution: point source and non-point source. Point source pollution refers to cases where a readily identifiable source, such as a pipe or ditch, transports the pollutant to a water body. Regulation and monitoring focus on the point of discharge. In non-point source pollution, no single source of pollutant discharge is easily identifiable but the collective effect of numerous sources results in a significant impact. Non-point pollution problems pose a difficult and costly management challenge.

Non-point pollution control options

Policy options to control non-point water pollution present special difficulties because of the great variety of sources and pollutants. The primary source of non-point pollutants is the agricultural sector. Fertilizers and pesticides are carried off the soil surface into lakes and streams or percolate into groundwater deposits. Aquifers become polluted by nitrates from fertilizer application and livestock wastes. Timber harvesting, land clearing for urban development and mining also originate non-point pollution of waters. Urban storm drainage, leakage from buried fuel tanks and subsurface and surface mining are other contributors.

Runoff from farms and forests may carry suspended solids and sediments, dissolved solids and chemicals (mineral fertilizers, particularly nitrogen and phosphorous, and pesticides). Other substances that often occur in diffuse source runoff are oxygen-demanding organic matter, petroleum products, heavy metals and faecal bacteria. Non-point source pollution is also characterized by its episodic nature. Occasional heavy rainfall or snowmelt is typically the trigger, in contrast to the more even flows of discharge from point sources. These characteristics of source type and timing imply that a variety of control technologies may be required for effective abatement.

Non-point pollution control may also be determined by the nature of human activities causing the problem. For example, the pollution resulting from a farmer's land depends not only on the rainfall patterns and the land characteristics (slope and soil texture), but on numerous prior land-use and production decisions, including choice of crops, tillage practices and pesticide and fertilizer use. The farmers' production choices are, in turn, influenced by market prices for inputs and products as well as by government price and income support programmes. In fact, pollution from the farm sector is exacerbated by government policies that make certain crops overly attractive. Successful policy interventions must change those aspects of farmers' decisions that are the source of pollutants.

Policy options for non-point pollution control are classed as cognitive, regulatory and incentive-based. Cognitive (voluntary) approaches use education, moral persuasion and technical assistance to influence the behaviour of polluters. Cognitive approaches are attractive because of their low economic and political costs. They have been tried in some countries but have had limited success. Several factors account for this; for example, private costs incurred to change land-use practices can be substantial while private gains may not be obvious. Because of the uncertain linkage between changing production decisions and improving water quality (often at distant locations), individuals have little incentive to try new approaches.

Regulatory policies call for specific actions or prohibitions against those responsible for water quality degradation. One approach is to use "design standards" that specify actions to be taken (such as a management plan for sediment control) or actions prohibited (such as certain cropping practices on highly erodible lands).52 "Performance standards", in contrast, place limits on the rate of pollution discharge to a water body. In this case, interference with land-use practices is only in response to observed violations.53

52 W. Harrington, A.J. Krupnick and H.M. Peskin. 1985. Policies for non-point source pollution control, J. Soil Water Conserv., 40: 27-33.

53 G. Anderson, A. De Bossu and P. Rush. 1990. Control of agricultural pollution by regulation. In I.B. Braden and S.B. Lovejoy, eds. Agriculture and water quality: international perspectives. Boulder, Colorado, Reiner.

Neither technique is without limitations. Design standard regulations are easier to enforce; however, they may be unnecessarily costly because their general application may impose costs on those who contribute little to the problem. Performance standards, in principle at least, focus more directly on the pollutant source but are difficult to monitor and enforce. Because an accurate measurement of discharges (particularly from small farms) is nearly impossible, disputes over actual sources of pollutants are unending.

The alternatives to regulatory policies include various incentive methods such as taxes, subsidies and emission trading policies.54 Taxes or fees can be levied on either inputs or pollution outputs. For example, extra charges have been imposed on agricultural fertilizers in Sweden, with proceeds used to fund water quality monitoring. Higher costs are expected to reduce fertilizer application rates and, therefore, water pollution. However, taxes are unlikely to be set high enough to affect land use significantly because of the adverse effects on income.

54 K. Segerson. 1990. Incentive policies. In J.B. Braden and S.B. Lovejoy, eds. Agriculture and water quality: international perspectives. Boulder, Colorado-London, Reiner.
Alternatively, charges may be levied for pollution by imposing an "effluent charge". However, the technical and administrative complexity of setting fees and linking numerous farmers precisely to the damages caused by their effluent is mind-boggling. No successful example of this type of taxation of non-point source pollution is presented in the literature.

Subsidies could encourage farmers to reduce pollution, adopt more appropriate land-use practices or make environment-friendly investments. Subsidies to prevent soil erosion (and the associated productivity losses) have a long history in many countries and are the most politically attractive of the available options. In contrast to other approaches, which impose costs on the emitting source and spread benefits over the entire society, subsidy costs are spread over the general population and gains are offered to the land user. Nonetheless, paying polluters to avoid polluting activities remains objectionable to some groups. Moreover, payments may be made to individuals who would adopt proper practices anyway.

Finally, the outright purchase of water rights and/or land-use rights is another approach. For instance, a public agency could acquire rights to part or all of the polluting lands and manage them to safeguard water quality. The purchase of tropical forest lands by either public or private agencies has been undertaken to preserve first-growth forests, with water quality improvements as a side-benefit. Again, costs are borne primarily by beneficiaries rather than by the land users whose practices are actually responsible for the pollution.

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