Determining the Economic Value of Water

The concept of economic value is embedded in the utilitarian approach, which is based on the principles of humans’ preference satisfaction. This value paradigm assumes that people have a quantitative (cardinal) utility scale against which they measure the relative degree of satisfaction (happiness or pleasure) they derive from consumption of alternative objects (goods and services) or their possible combinations. According to the utilitarian approach, a commodity has economic value when users are willing to pay for it rather than do without. The economic value of a commodity is the price a person would pay for it (or, on the other side of the transaction, the amount a person must be paid in compensation to part with it). Economic values can be observed when people make a choice (reveal preferences) among competing products available for purchase (or for barter trade - values need not be expressed only in monetary units). In economic terms, water is an essential commodity so the value (willingness-to-pay) for a basic survival amount is infinite. Once basic needs are met, economic valuation can make an important contribution to decisions about allocating water. Water can be considered a natural asset, the value of which resides in its ability to create flows of goods and services over time. Values derived from water can usually be divided into two types: use values and non-use values. The use values arise from the direct use of water by consuming it or its services. Water uses can be further specified under several different categories. Three options are considered by sub tractability, by location, and by economic role. Non-use values are values placed on the mere existence of a resource and its physical, biological or cultural characteristics. Non-use values are benefits received from knowing that a good exists, even though the individual may not ever directly experience it.