David Zilberman

University of California at Berkeley, USA

The transfer of water resources to arid zones has transformed these regions from desolate deserts to some of the most prosperous regions in the world. This is the case for the Los Angeles basin in the Central Valley of California, the Tucson-Phoenix corridor in Arizona, and the northern Negev Desert in Israel. The overall success of settlements resulting from water projects does not imply that each water project has been economically viable and socially justifiable. There is concern about environmental impacts from water transfer projects at the source and target regions. Scarcity of public funds, historical perspective, and technological progress suggest that decision-making and water allocation rules that led to many of the past water projects have to be modified, and new mechanisms for allocation of existing water have to be introduced.

Apparently, past water projects were seen as engineering challenges without much attention to the impact on the source region and to efficient allocation at the target region. Therefore, there is a growing importance to using correct benefit-cost analysis on the impact of new water projects, taking into account their effect on environmental amenities at the source regions and recognizing the consumptive as well as nonconsumptive benefits of water resources. The design of water projects has to balance returns-to-scale consideration that may favor larger projects with the ability to improve technological efficiency in the target region that may favor smaller projects. This may lead to overinvestment in initial stages and later may result in restoration projects that now exist in California and Florida.

Water has been allocated in many cases using queuing systems, where settlers were given the right to utilize water at a subsidized price. In many cases, these rights were dependent on continuous use of water and were not transferable. This water right system has led to an inefficient use of water and generated a false perception of water scarcity. A major challenge is to redesign a water allocation system that will enable trading and shift water from low-value to high-value use. California, for example, introduced an electronic water market to cope with drought situations which gradually led to increased efficiency in agricultural water use while stabilizing or even reducing overall water allocated to agriculture. As scarcity of water increases, many of its aspects should be treated like economic commodities allocated for incentives and rely on market forces when possible.

Because of the complex nature of water, the market forces themselves cannot efficiently allocate and manage its use in the long run. Public policy should be enacted to assure water quality and to prevent contamination of ground and surface water. For example, incentive to reduce contamination of water by chemical residue, animal runoff, and other activities should be introduced. Collective actions should be used to assure efficient use of ground water in the long run. Israel has outstanding public control and documentation of ground water, and such a system prevents open access problems and should be applied elsewhere. Environmental agencies should also be encouraged to establish funds to buy water rights for maintenance and restoration of environmental amenities.

Water is a disputed resource in many regions. However, some of the tension should be reduced recognizing that, to a large extent, water resource problems are economic problems. Incentives that increase adoption of efficient water use technologies and research and development that will introduce such technologies can reduce some of the perception of water scarcity and some of the tension and conflict about water use. New technologies including drip irrigation, precision farming, and information systems are likely to increase the efficiency of water use in agriculture and produce increased yield with less water, thus reducing demands for water. New technologies such as salinization may be capable of increasing water supply. When real shortages exist and the economics justify it, investment in the desalinization of similar systems may increase supply and thus reduce tension and solve political problems. For example, in the conflict between the Israelis and the Palestinians, Israel may in the future use salinization to provide water for human consumption that may be consumed by the Palestinians, say, in Gaza while the wastewater can be recycled and used for agriculture. In certain areas may provide water for human consumption, while wastewater can be recycled and used for agriculture. The challenge of economists and policymakers is to design mechanisms to increase water use efficiency, while taking into account equity considerations using water policies to enhance cooperation, peace, and prosperity.