Challenges to Valuing Water: What to Value, Water Competition, and Willingness to Pay

The first challenge in estimating the value of water to the consumer and society is to determine which qualities, amounts, and uses to include. Human health is an obvious value, as are general household and industrial and agricultural uses. Water is used for many valued activities, which fall into three categories: (1) direct, including household consumption, waste disposal, and recreation as well as industrial and agricultural input use in production processes or as a method of eliminating waste; (2) indirect, including hygiene, ecosystem maintenance, flood protection, and aesthetics; and (3) nonuse, including the values people place on the existence of bodies of water, such as the Great Lakes. One framework for water valuation is the Total Economic Valuation Framework, which was used in Canada to quantify the value of Canada’s natural resources, including water. The focus of these remarks is on drinking water as it directly affects human health.

Drinking water has two main dimensions that affect health: quantity and quality. Water quality is a critical component in value for consumers and directly links to health. Economists use a willingness to pay (WTP) approach in order to value drinking water quality. By enumerating a number of components of quality, they then have survey respondents reveal their values through a series of tasks designed to elicit trade-offs made across different aspects of water quality. This is a difficult problem for water, as it may be difficult for consumers to separate out components of water quality, and there are no competitive markets to allow market comparisons. The lack of a market to equilibrate between the supply and the demand for water is problematic, in that many people have no concept of their consumption levels or the quality of water they consume. Even more complicating is the fact that value may differ significantly in different contexts.

In Canada, the metering of household water consumption is not universal. Approximately two-thirds of households are metered, which results in many individuals not knowing how much water they use and therefore having little understanding of the value of water. A similar situation exists in the United States. An exacerbating factor in both countries is that the pricing structure designed by water utilities generally is intended as a cost-recovery exercise relating to administrative costs and past infrastructure cost recovery. Thus individual households can in theory use very large volumes of water, but be charged only a minimal administrative cost. Furthermore, current pricing structures do not generally cover infrastructure renewal or innovation. Overconsumption and ignorance of the amount of water usage arise from the lack of understanding that water is scarce. Current pricing structures encourage the perception that water is not scarce, which results in a reference bias, in which water becomes a free good and its value is zero. Because there is no feedback mechanism, such as volumetric pricing, people have the tendency to overconsume.

Similarly for the industrial sector, the pricing structure is such that the cost of one more unit of water is so small that firms are discouraged from adopting

The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement