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Montserrat Termes

Water and the real economy

PhD in Economics - University of Barcelona. Technical advisor in Cetaqua

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Montserrat Termes. PhD in Economics - University of Barcelona. Technical advisor in Cetaqua

In most articles and books on water we find the assertion that water is essential for life. However, and even if this is obvious, it seems that our actions often contradict this statement. Our willingness to pay for water, even if without water, there is no life, is low given the perception that it is an "infinite" resource. In fact, economists use the idea of the willingness to pay for, or the value derived from using water and the exchange value, reflected in the price we pay and that it gives us the possibility to exchange it for other goods. The reason that leads me to introduce this difference is none other than the so-called paradox of water and diamonds. Although water is more useful than diamonds (it gives us life), we pay a very high price for diamonds. The paradox was introduced by Nicholas Copernicus, but Adam Smith mentions it explicitly in the Wealth of Nations. To solve it, the theory of marginal utility was introduced and, hence neoclassical economics, which states that what determines the price of a commodity is not so much its demand as its marginal utility. Therefore, the value of a commodity depends on certain circumstances and the value that individuals give them, regardless of whether it is necessary for survival or not. But what are these circumstances? Precisely not only the availability of resources but also their usefulness and scarcity. Hence it seems appropriate to reflect on the value of water from a broader viewpoint that includes its value as heritage and the value derived from its own existence.

Water is perceived as an abundant resource and, therefore, the economic value of water has been linked to its use as an input to production. Water is used in agriculture, industry and services, as well as in the provision of urban water and sanitation services. In its attribute of being a public commodity (non-rival consumption and no possibility of exclusion) brings us benefits such as recreation, leisure, assimilation of waste, or its own aesthetic value. Thus, water prices for these different uses do not give us a true reflection of value, rather only offer us a guide to make efficient investments and decisions on the allocation of resources. Because of this, it seems very important to recognize the economic value of water and to evaluate the benefits of the resource in its different uses. Water has an important role in economic growth that becomes more evident in situations of scarcity and helps us to incorporate the value of non-use into the economic value of water.

Precisely, for those uses in which water is an input, it is very clearly assigned a value. Consequently, water is already included in the real economy in the sense that We can carry out an economic valuation of its use as an input to production. Accordingly, in the case of agriculture, a sector that accounts for about 70% of water consumption in Spain, water becomes an essential element for irrigation activity. In any case, the use of irrigation in agriculture is a practice to produce and provision food to everyone in times when there is not enough rainfall. In addition, the use of irrigation water allows increasing the productivity and to be able to harvest in a certain period of time. Hence one of the objectives of the sector is to increase irrigated agriculture. However, We need to take into account the negative externalities that it causes in case of excessive use causing erosion, and alteration that can cause in the soil, or that the excessive extraction of the resource can cause disasters like that of the Aral Sea.

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