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Valuing Ground Water: Economic Concepts and Approaches
Scarcity imposes an opportunity cost, which economists refer to as a marginal user cost. Greater use of the resource today diminishes future opportunities for use, so the marginal user cost is the present value of these foregone opportunities. Using ground water for watering lawns and agricultural purposes may not be appropriate under conditions where drinking water supplies to future generations are denied but may be wholly appropriate in situations with sufficient supplies of water. Failure to take higher scarcity value of water into account will lead to extra costs to society by imposing extra scarcity on the future. Conversely, overconservation in areas with sufficient supplies will impose additional costs on society today.
Allocation of the ground water resource over time is affected by the discount rate. The higher the discount rate, the greater the amount of the resource that will be allocated to the earlier periods. Higher discount rates skew consumption and use toward the present because they give less weight to future net benefits. The methodology for choosing an appropriate discount rate is a matter of continuing debate: "after a lot of time trying to discover an unassailable definition of the social rate of discount, economists are beginning to decide that a totally satisfactory definition does not exist" (Page, 1977). The proper rate depends, in part, on the context of the decision being analyzed (Lind, 1990) but the role of the discount rate is to ensure that scarce resources are allocated efficiently over time.
Issues of whether resources are allocated fairly over time are different, albeit important, issues. In Sustaining Our Water Resources (NRC, 1993a), Brown Weiss notes that: "… the withdrawal of ground water in excess of recharge rates to supply potable drinking water or rapid withdrawal of water from nonrechargeable aquifers, will cause conflicts between immediate satisfaction of needs and long-term maintenance of the resources." Brown Weiss notes further that in these cases "means need to be developed to reconcile intergenerational concerns with the demands of the living generation."
Issues of whether allocations over time are fair are difficult to address through the selection of a discount rate. Recent literature has raised questions about the applicability of cost-benefit analysis as currently practiced to deal with intergenerational issues. Smith (1988) suggests that many resource problems we face today, including depletion of ground water resources, "stretch the conceptual basis for benefit-cost analysis well beyond the bounds for what it was intended—a single generation borrowing from itself." Page (1988) suggest a fundamental change in how economists evaluate allocation issues that span many generations. In his view the question is not simply one of selecting the appropriate rate of discount, but of basing policy decisions on an intergenerational social choice rule, according to what society considers "fair." In his earlier writings, Page (1977) argues for preserving the opportunities for future generations as a common sense minimal notion of intergenerational justice. Preserving these opportunities is critical in settings where there are irreversibilities and a large degree of uncertainty with respect to both the size of the resource stock and the future