The Economics of Managing Scarce Water Resources

This article surveys the literature on the economics of water scarcity and water demand. We examine demand estimation in diverted uses (urban, agricultural, and industrial), as well as the demand for instream uses such as recreation and habitat preservation. The article also assesses what is known about efficient water pricing, water allocation, and water trading within and across sectors. The literature examining the efficiency and distributional impacts of large water projects such as dams for irrigation and hydroelectric power is also discussed. Water conservation is examined from the perspective of efficiency and cost-effectiveness. We highlight water management issues to which economics has made important contributions, as well as areas where further research is needed.