This document discusses economic instruments for integrated water resource management. It outlines key concepts like the public good nature of water, supply and demand, and full cost recovery. Economic instruments can help balance water supply and demand management by addressing issues like markets not being active in the water sector. Instruments mentioned include water tariffs, taxes, subsidies, fees, permits, and pollution charges. The goal is to help recover the full costs of water services provision given water's public good features.

1. Economic and Financial Instruments for IWRM Introduction to economic instruments for water management

2. Goals and objectives of the session To know what are the public good aspects of water benefits To manage basic economic concepts of supply and demand, and full cost recovery To have clear definitions of economic instrument for water management

3. Outline Public-good nature of water resources Supply and demand Main approach: full cost recovery Definition of economic instruments

4. Introduction Economic instruments are increasingly important for IWRM Traditional supply-oriented approaches fail to use economic instruments, especially for demand management Economic instruments are valuable to implement a more balanced supply-demand management approach to IWRM

5. Benefits from water Use for drinking, cooking, sanitation Industrial use Hydroelectric use Transportation Fishing Agricultural use Waste assimilation benefits Aesthetic and recreational values Non-use values (ecological services, preservation)

6. Multi-sector use

7. Public-good nature of water resources

8. Supply: producers behaviour Try to seek to maximize benefits from the production of a good or service Use some technology to transform inputs into some output (or multiple outputs) Demand inputs Will react to changes in input and output prices

9. The supply function Quantity supplied Price

10. The role of variable and fixed costs

11. Demand: consumers behaviour Have defined preferences for goods and services; Seek to maximize the benefits (utility) they get from consumption; Consider the costs (price) they have to pay for consuming a good or service; Be restricted by their budgets when taking consumption decisions. Importance of willingness to pay (WTP)

12. The demand side and net benefits Price Quantity demanded Net benefits for consumers when a price p* is charged p*

13. Competitive market

14. Reasons why markets are not active in the water sector In competitive markets, supply and demand will interact to form an equilibrium price with optimal allocation of resources. Competitive firms will recover automatically their production costs (otherwise these are out of the market). Competitive markets, however, are seldom feasible for water services given its many public-good features and high transaction costs. Monopoly tends to appear in the provision of large infrastructure water services (domestic use, hydropower and irrigation). However, costs are still generated and somebody has to pay for them.

15. Full cost recovery approach: the situation Plus: V: Environmental costs VI: Opportunity costs Supply Costs: I: Operations and maintenance costs only II: Average financial (capital + O&M) cost, with capital valued in terms of historical costs III: Average financial (capital + O&M) cost, with capital costs computed in replacement terms IV: Long run marginal cost of additional supplies

16. Defining economic instruments Imbalances in supply-demand of water services Economic instruments can be used: Water tariffs, taxes and subsidies Fees, connection charges, abstraction charges and bulk water pricing Discharge charges and pollution taxes Tradable water permits, pollution permits

17. Think about it Could you give examples from your own experience regarding the public good nature of water in different circumstances? Do you think the full cost recovery policy is currently applied in your country to the water sector? How? Why?

18. End The next presentation, still related to chapter 3, deals with water valuation methods.