Cooperative management of water resources: An economic
perspective
Dr. J. Wesley Burnett, West Virginia University, United States
This article is one of the ten finalists of the Global Water Forum 2013 Emerging Scholars
Award.
Nong Bong Khai Non-Hunting Area, a
wetland in a densely populated
agricultural area in North-East Thailand.
Increasing global demands for food and freshwater are putting pressures on the world’s
water resources. With this increase in demand, water governance has become a salient
global issue. In reaction to these issues the U.N. General Assembly declared 2013 as the
U.N.’s “International Year of Water Cooperation,” with the objective of raising awareness
for increased cooperation for access to water and the challenges facing water management.1
Water-related issues are often defined by economists as common-pool resource (CPR)
problems. Ostrom (1990, pp. 30) defined CPRs as:
“A natural or man-made resource system that is sufficiently large to make it costly (but
not impossible) to exclude potential beneficiaries from obtaining benefits from its use.”2
CPRs are broadly defined as “public goods.” Generally speaking, a public good is a non-rival
commodity, where one consumer’s consumption does not reduce the amount available to
other consumers.3 Public goods often lead to circumstances in which the outcomes in free
markets are inefficient, resulting in “market failure.” The circumstances are attributed to
incomplete contracts, deficiencies in property rights, and/or peculiarities in the physical
nature of the goods involved.4 Public goods also have the property of excludability, where a
Global Water Forum www.globalwaterforum.org | 1
Cooperative management of water resources: An economic
perspective
non-exclusive commodity is one in which it is illegal to exclude other consumers from
consuming the commodity or the cost of exclusion is too high. These properties are outlined
in the context of commodities in Table 1.
Table 1 (enlarge). Rivalry and
excludability in commodities.
As can be gleaned from Table 1, CPRs fall under the category as rival but non-excludable
commodities. CPRs are often open access resources which lead to congestion problems – for
example, overfishing in a common water body – which are called “congestion externalities.”
The non-exclusiveness of water undermines property rights and results in inefficiency, and
without excludability it is nearly impossible to allocate a price for use. On the demand side,
this implies that the good will not be rationed. On the supply side, this implies that the
resource will not provide sufficient revenue, and therefore the resource will not be properly
maintained or conserved. As a result, the typical allocative results of non-exclusive
resources, such as water, are under-provision of the good; overexploitation of the resource;
and, underinvestment in management and conservation of the resource.4
CPRs often lead to adverse incentives for consumers. One such example is that of a “free
rider,” who cannot be excluded from receiving the benefit of the resource but is unwilling to
pay his/her portion of the cost.4 Another example is the “tragedy of the commons,” where a
shared resource (water) is depleted by individuals acting independently and rationally
according to their own self-interest, despite their lack of understanding that depletion of the
common resource is contrary to the group’s interest. Both examples demonstrate that a lack
of cooperation leads to inefficient allocations.
Hence, the focal point of the governance of CPRs is the regulation of access and a fair
distribution of costs and benefits between the users. Economic theory points to the fact that
since markets themselves are not efficient instruments to manage the resource, public
Global Water Forum www.globalwaterforum.org | 2
Cooperative management of water resources: An economic
perspective
intervention is required in terms of assigning property rights and quotas, or imposing
taxes.5 Classic examples include problems with CPRs in the case of fishery harvesting6 and
the optimal management of groundwater.7
But this begs the question, what institutions are appropriate to mitigate CPR problems,
especially with transboundary governance? In some cases privatization, as in the example
above of the common grazing land, is sufficient, 8 but in other cases it may be more
appropriate to create institutions that motivate users to internalize the congestion
externality and cooperate in order to preserve the resource. 2 Often there is no single
solution or “panacea” because every case is unique.
Figure 1 (enlarge). Multitier framework
for analyzing socio-ecological systems.
Source: Ostrom (2007).
What is needed is a multitier framework to assess governance of CPRs. 9 According to
Ostrom (2007), such a framework would help stakeholders to analyze (i) the attributes of a
resource system (e.g., river basin, lake, acquifer), (ii) the resource units generated by the
system (e.g., freshwater, fish), (iii) identify the users of the system, and (iv) the governance
system including its direct and indirect effects on the resource system. A flow diagram is
presented in Figure 1.
The diagram in Figure 1 demonstrates the complex social and ecological systems in which
water resources and people that govern live. The multitier framework is consistent with a
“systems-based approach,” which is a multi-disciplinary approach that provides
comprehensive planning, analysis, design, and management of water resources.10 Economics
is one discipline within a systems-based approach that can provide useful insights into
combatting our water challenges.
Global Water Forum www.globalwaterforum.org | 3
Cooperative management of water resources: An economic
perspective
This article is one of the ten finalists of the Global Water Forum 2013 Emerging Scholars
Award.
References:
1. U.N. General Assembly (2011), ‘Resolution adopted by the General Assembly on 20
December 2010’, available from:
http://www.un.org/ga/search/view_doc.asp?symbol=A/RES/65/154.
2. Ostrom, E. (1990), Governing the commons: The evolution of institutions for collective
action, Cambridge University Press, Cambridge, U.K.
3.Wetzstein, M.E. (2005), Microeconomic theory: Concepts and connections.
Thomson/South-Western, Mason, OH U.S.A.
4. Bergstrom, J.C. and Randall, A. (2010), Resource economics: An economic approach to
natural resources and environmental policy, 3 ed. Edward Elgar Publishing, Northampton,
MA U.S.A.
5. Esteban, E. and A. Dinar (2013), ‘Cooperative management of groundwater resources in
the presence of environmental externalities’, Environmental and Resource Economics 54:
443-469.
6. Gordan, H.S. (1954), ‘The economic theory of a common-pool property resource: the
fishery’, Journal of Political Economy 62: 124-142.
7. Milliman, J.W. (1956), ‘Commonality, the price system, and use of water supplies’,
Southern Economics Journal (22): 426-437.
8. Coase, R. (1960), ‘The problem of social cost’, Journal of Law and Economics (3):1-44.
9. Ostrom, E. (2007), ‘A diagnostic approach for going beyond panaceas’, Proceedings of the
National Academy of Sciences, 104 (39), 15,181-15,187.
10. Simonovic, S.P. (2008). Managing Water Resources: Methods and Tools for a Systems
Approach, Routledge, NY U.S.A.
J. Wesley Burnett, Ph.D., is an Assistant Professor at West Virginia University in the Division
of Resource Management. His research focuses on energy, environmental and natural
resource economics. Dr. Burnett can be contacted at [email protected].
The views expressed in this article belong to the individual authors and do not represent the
views of the Global Water Forum, the UNESCO Chair in Water Economics and
Transboundary Water Governance, UNESCO, the Australian National University, or any of
the institutions to which the authors are associated. Please see the Global Water Forum
terms and conditions here.
Global Water Forum www.globalwaterforum.org | 4