chapter  5
WATER USE EFFICIENCY
Pages 37

The development and use of water resources affect a number of societal concerns including income distribution, regional development, and the level of total national product. Since policy changes designed to alter water use are likely to have varying qualitative effects on some of these matters, and since they are seldom, if ever, defined such that quantitative comparisons can be made among them, abstraction is essential for examining the efficiency of water use. The most common abstraction adopted by economists is to evaluate efficiency in terms of maximizing the present discounted value of net national income at market prices over some time period. This section examines some of the advantages and limitations of this definition of efficiency and presents the conditions which must be satisfied to achieve such an efficient water use. Then, the second section evaluates current water use, government policies, and regulating institutions by the extent to which they impede or promote such an efficient water use. And the third section evaluates alternative means of improv-

ingwateruseefficiencyinCuyo.Thisthirdsectionreintroducesother societalconcerns,inparticular,incomedistributionandriskavoidance objectivesinevaluatingpolicyalternatives. 1

MaximizingNetNationalIncomeoverTime

Oneofseveralweaknessesofdefiningefficiencyintermsofnetnational outputisthatthemarginalutilityofincomeisassumedtobeconstant andequalforallpeople,i.e.,thedistributionofincomeisnotimportant.2Ifweavoidanyassumptionregardingtherelativemarginalutilitiesofincome,wecannotproceedveryfarinevaluatingwateruse.This canbedemonstratedbyconsideringthelimitationsofdefiningefficiency asanysituationwhichsatisfiestheconditionsofParetooptimality.A Paretooptimumisasituationinwhichnoonepersoncanbemadebetter offwithoutmakingatleastonepersonworseoff.Suppose,quiterealistically,thataredistributionofgroundandsurfacewateramongexisting farmerscouldbemadesuchthattherewerenochangeinthequantityof waterreceivedbyanyfarmer,butthatthetotalcosttosocietyofproviding thewaterwereless.Ifjustonefarmerexperiencedanincreaseincosts fromthischange,wecouldnotdescribeitasanimprovementormore efficientwaterusefromtheconditionsofParetooptimalityalone.The systemwouldbeabletocompensatethelosersfortheirhighercostsand stillbeabletoimprovethepositionofsomeoneelse.Butitisnotenough justtoknowthatthesystemcouldcompensateanylosers.Ifweareto avoiddistributionalvaluejudgments,actualcompensationwouldhave tobemadebeforethenewsituationcouldunambiguouslybecalledan "improvement."Sincealmostanyredistributionofwatereitheramong farmsorovertimewould,intheabsenceofcompensatingpayments, makeatleastonepersonworseoff,eithernoworinthefuture,and sinceadequatecompensationfrequentlyisnotmade,theParetooptimal criteriondoesnottakeusveryfarinevaluatingCuyo'swateruse.To proceedfurther,anassumptionregardingtherelativemarginalutilities ofincomeisnecessary.Themostcommonandusefulassumption,since itenablesefficiencytobeexaminedindependentlyofdistribution,isthat

the marginal utility of income is equal for everyone. This implies that we can define efficiency in terms of maximizing net national income.