The economic value of water in agriculture: concepts and policy applications

The design of institutions that maximizes water's beneficial use in the face of growing demands for scarce and random supplies is the central policy issue in dry places. Information on water's economic value enables decision makers to make informed choices on water development, conservation, allocation, and use when growing demands for all uses are made in the face of increased scarcity. Conceptually correct and empirically accurate estimates of the economic value of water are essential for rational allocation of scarce water across locations, uses, users, and time periods. This review article raises several issues that must be considered in deriving accurate estimates of the economic value of water. These include establishing common denominators for water values in quantity, time, location and quality; identifying the point of view from which values are measured; distinguishing the period of adjustment over which values are estimated; and accounting for the difference between total, average, and incremental values of water. We illustrate values of water for agricultural use, based on a recent drought policy analysis of the Rio Grande Basin.