ABSTRACT
Water markets are the most efficient and equitable mechanisms for reallocating water to its highest and best use, and thus minimizing scarcity value. By definition, market trades can only occur when there are significant differences in the scarcity value of the resource between alternative sites and uses of water, and where there is the ability to transfer water physically from one location to the other. Another major driver of water markets is an increase in scarcity value of water that makes past efficient allocations now redundant and undervalued compared with its alternative value elsewhere. In this chapter, we analyze factors driving the change in water scarcity in terms of shifts in the physical and technical supply of water, and changes in demand for water driven by population growth, industrialization, and the expansion of irrigated agriculture. Not all the news is bad, despite the small industry that regularly publishes straight-line extrapolations of population and industrial growth to project an upcoming water Armageddon. We will spend some time examining the evidence of the existence of a water Kuznets curve which has the familiar inverted U-shaped curve and where the income elasticity of demand for water is shown to change in sign and magnitude as economic development increases aggregate income. The existence of a Kuznets curve for water holds out the possibility of long-term stability between demand and supply of water. However, the rapid rate of industrialization in many countries and high population growth in some parts of the world will still mean that the macro water economy will be facing significant growth in the medium run with consequent increasing scarcity.
