Tug of water: an economic perspective on water and the environment

As economies expand globally, the strain on the earth’s natural resources becomes increasingly apparent, and perhaps one of the most pertinent issues facing us today is that of water scarcity. Hitherto widely perceived as a free good, the demand for water now outstrips supply over much of the earth’s surface. Indeed, the International Water Management Institute estimates that one third of the world’s population face some form of water scarcity, either due to lack of investment in water supply (or inequitable distribution) or due to physical scarcity, where there is not enough water to meet demands. It is the latter situation that is most pertinent in terms of impacts on our natural capital. In these areas, increasing demand for water means that aquatic and other water-dependent ecosystems are threatened by the abstraction or pollution of the flows that are required to sustain them.

Sustainable development can be defined as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. This requires balancing the demand for natural resources with the protection of ecosystems that also contribute goods and services necessary for economic growth. In the context of integrated water resource management, this means achieving a balance between viewing water as a commodity to promote economic growth, create jobs and eradicate poverty; and recognizing it’s role in maintaining the functioning and resilience of ecosystems.

caption Source: Jane Turpie,, modified by Sherri Haertling Neuberger
Figure 1. The three goals of resource management.

In recent decades, growing awareness of environmental issues and their relationship to the economy has seen the emergence three main policy goals in natural resource management: efficiency, equity and sustainability (Fig. 1). These economic, social and ecological goals, respectively, are been embodied in changing national water policies, such as in South Africa, an extremely water-stressed country. The goal of efficiency relates to maximizing economic returns to aquatic resources, or achieving the greatest possible net benefit. This can also be seen as fulfilling a goal of economic development. The goal of equity is to ensure that the economic benefits obtained from aquatic ecosystems, and the costs incurred in water supply development, are distributed fairly. Social goals include meeting basic human needs for water and aquatic ecosystem goods and services. Social goals are also concerned with the optimal allocation of resources in terms of the equitable distribution of costs and benefits among members of society. The goal of sustainability recognizes the limits to resources in the light of population growth and economic development, and promotes the use of resources in such a way as not to compromise the economic opportunities and social well being of future generations. Ecological goals include meeting national and international biodiversity conservation obligations, as well as ensuring an acceptable state of health of resources in the short- and long-term.

However, economic, social and ecological goals are potentially conflicting and are not simple to solve simultaneously. A number of trade-offs therefore have to be considered in the allocation of water. Economics addresses the problem of how scarce resources are allocated among unlimited wants. Water resources are scarce and have to be allocated between the environment and a number of other competing uses. If the environment is not valued then all water resources will eventually be allocated to consumptive use. On the other hand, overprotection also has opportunity costs in the form of lost economic production and social welfare. An optimal balance needs to be found which maximizes societal welfare and effectively deals with the important issue of addressing inequality. Societal welfare stems, in part, from total economic output and its distribution (which translates into household cash income), as well as from meeting basic human needs (in terms of water supply and the supply of ecosystem goods and services needed for subsistence). It also needs to balance the needs of present and future generations.

The value of water is most readily appreciated as a direct input to economic production. Water is an essential input to all sectors that contribute to the overall economic output of the economy, although the productivity of water differs enormously from sector to sector. These values are relatively easily measured as they make a direct contribution to economic output measured in the national accounts [e.g. Gross Domestic Product (GDP)]. National income statistics are taken to be indicators of household income, and hence societal welfare.

The value of aquatic ecosystems is less readily understood. Aquatic ecosystems offer a range of goods, services and attributes that generate value and contribute to human welfare. The concept of ecosystem goods and services, popularized in the ecological-economics literature, stems from the perception of ecosystems as natural capital which contributes to economic production. Goods, services and attributes (often referred to collectively as ‘ecosystem services’) may be defined as follows:

  • Goods are harvested resources, such as fish.
  • Services are processes that contribute to economic production or save costs, such as water purification.
  • Attributes relate to the structure and organization of biodiversity, such as beauty, rarity or diversity, and generate less tangible values such as spiritual, educational, cultural and recreational value.

More recently, the Millennium Ecosystem Assessment (2003) categorized the services obtained from ecosystems as follows:

  • Provisioning services such as food and water;
  • Regulating services such as flood and disease control;
  • Cultural services such as spiritual, recreational, and cultural benefits; and
  • Supporting services, such as nutrient cycling, that maintain the conditions for life on Earth.

The first three align well with the definitions of goods, services and attributes described above. The fourth, supporting services, has created some controversy as inclusion of these ‘services’ in a valuation study can lead to double counting. It does, nevertheless, highlight the fact that the other services cannot be generated without these underlying processes.

The main types of ecosystem services that are associated with aquatic ecosystems are described in Table 1.

Table 1. Ecosystem goods, services and attributes of wetland ecosystems, adapted from Costanza et al. (1997)


Ecosystem Goods, Services & Attributes
Goods Water Provision of water for subsistence use
Food, medicines Production of fish and food plants; medicinal plants
Raw materials Production of craftwork materials, construction materials and fodder
Services Carbon sequestration Wetlands are believed to be carbon sinks and therefore contribute towards reducing carbon emissions
Groundwater recharge Some wetlands facilitate infiltration of rainfall and river flows into groundwater aquifers which are tapped (with wells and boreholes) in surrounding areas for agricultural, domestic and other uses.
Flood attenuation Some types of wetlands ameliorate flooding by offering resistance to the advance of flood waters. This reduces the risks of and damage caused by floods in the areas downstream of the wetland.
Regulation of water flows Some wetlands capture wet season rainfall and facilitate its infiltration into the groundwater. This water is then released more gradually lower down in the catchment, and is important for maintaining dry season base flows, which are important for agricultural, industrial and household use. Without the wetlands, much of the wet season precipitation would be lost as excess runoff which is not captured in reservoirs.
Erosion control and sediment retention Wetlands have the capacity to capture fertile sediments, which enhance agricultural productivity, as well as stopping the transport of excess sediments due to erosion in catchment areas. The latter service helps to maintain the capacity and lifetime of any downstream dam
Waste treatment Many aquatic ecosystems are thought to have the capacity of breaking down wastes and detoxifying pollution, complementing the service provided by rivers of dilution and transport of pollutants.
Ecological regulation Regulation of malaria, bilharzia, liver fluke, black fly, invasive plants, etc.
Refugia and nursery areas Aquatic ecosystems may provide critical breeding, feeding or watering habitat for certain species that contribute to livelihoods and economic production elsewhere.
Export of materials and nutrients Export of nutrients and sediments to marine ecosystems
Attributes Genetic resources Medicine, products for materials science, genes for resistance to plant pathogens and crop pests, ornamental species
Structure and composition of biological communities Species diversity and habitats providing opportunities for recreational and cultural activities


Thus, functioning aquatic ecosystems generate goods and services that contribute to economic production and societal welfare, though not all of these values are recognized or accounted for in conventional economic analysis or in national accounting statistics. Until relatively recently, the value of ecosystem goods and services have largely been ignored in decision-making, to the detriment of resources, their functioning and the well-being of people that are directly or indirectly dependent on them. In recent years, however, there has been a plethora of research into the value of aquatic ecosystems, and this has changed the course of thinking and highlighted the importance of taking these values into account in decision-making. Although frequently hampered by lack of biophysical understanding and data, numerous studies have highlighted the enormous values that some aquatic ecosystems have in terms of the services they provide, such as water purification, carbon sequestration and flood attenuation. In developing countries in particular, many aquatic ecosystems generate significant income from tourism and most are vital in sustaining local livelihoods. For example, wetlands in eastern and southern Africa attract concentrated populations who depend on them for grazing, agriculture, and the harvesting of natural resources for food, medicine and raw materials. These resources provide about a quarter of household income in these areas (Fig. 2). However, the monetary value of harvested wetland resources still undervalues these resources, as it does not reflect their importance in terms of reducing risk, such as in times of drought, or as a safety-net to families that have suffered shocks such as job losses. These are crucial functions in countries where governments provide very little in terms of social welfare.

caption Figure 2. Percentage contribution of different sources of income to overall household income on the Rufiji floodplain, Tanzania (livestock = goats and chickens) and next to Lake Liambezi, Namibia (livestock = cattle). (Source: Turpie & Barnes 2003)

The output of aquatic ecosystem goods and services is affected by the quantity and quality of water flows into these resources. Many economic activities thus impact on the ability of aquatic ecosystems to deliver these services. These include activities that intercept stream flow, such as plantation forestry, and activities that modify return flows, such as dry land agriculture (which yields pollutants) and hydropower generation (which changes flow patterns and volumes). These activities are similarly appreciated in terms of their contribution to the national economy, but the economic consequences of the impacts that they have on resources and other downstream users has not generally been taken into account, at least not in formalized or quantitative way. The use of water resources to dissipate wastes is seldom quantified as an economic benefit provided by the aquatic environment. When waste disposal into aquatic systems exceeds their absorption capacity, the environmental damages that impact on the other resource users are not accounted for and health risks can arise. These environmental damages, resulting from the reduction of water quantity and quality (resource quality), are known as negative externalities in the economic production process.

The conservation of aquatic ecosystems affects the amount of economic production from activities which use water or affect water supply, in that the higher the level of protection of a resource, the smaller the volume of water that can be allocated to these activities. It also affects the amount of economic production due to goods and services produced by functioning resources, as well as other values associated with these resources. The total value derived from aquatic ecosystems can be considered as a function of both the economic activities that impact on the ecosystems, and the goods and services emanating from them:

UA = U (X1, X2, … Xn; Q1, Q2, … Qm),

where UA is the total utility, or value, derived from the system A, (X1, X2, … Xn) are the economic activities which impact on the resource, and (Q1, Q2, … Qm) are the goods and services provided by the resource. There is a complex matrix of interactions between these variables. Most pertinent here is that a change in the output of Xn is likely to induce a change in the output of Qm.

caption Figure 3. Hypothetical production possibilities frontier curve showing the economic trade-offs between allocating water to impacting activities versus to aquatic ecosystems. This assumes a non-linear relationship between ecosystem health and the value of ecosystem goods and services delivered. (Source: Author)

The trade-offs involved in the allocation of water between users and the environment can be represented by a simplified two-dimensional production possibilities frontier curve (Fig. 3). There is limited economic value that can be obtained from resources, and the type of value generated depends on allocation decisions. The maximum value that can be obtained from different allocative combinations is illustrated by the production possibilities frontier curve. Current allocations would probably fall well within this curve, since use of aquatic resources is far from 100% efficient. The production possibilities frontier curve illustrates the opportunity costs of licensing activities that consume or impact on water supplies to aquatic ecosystems in terms of the loss in values generated by those systems, and conversely, the opportunity costs of conserving the environment by limiting the use of water. The curve is convex because of the law of diminishing returns. As more water is allocated to agricultural and other uses, so the opportunity costs due to losses of ecosystem goods and services are likely to increase, and vice versa.

caption Figure 4. Hypothetical differences in the nature of trade-offs between values that impact on water supplies to aquatic ecosystems and the values generated by those ecosystems for sensitive versus robust ecosystems. (Source: Author)

The trade-offs described above are also influenced by the characteristics of the resources themselves: resilience, storage and water quality; whether it is a surface or aquifer system; and the ecosystems associated with them. In ecosystems whose functioning is highly sensitive to the quantity and quality of freshwater inputs, the marginal opportunity costs of a reduction in water supply to the environment would be higher than for a more robust ecosystem (Fig. 4). Thus the opportunity costs of increasing economic output from consumptive uses of water could be minimized by concentrating supply from more robust ecosystems. The importance of integrating ecological and economic issues is further highlighted by the complicating fact that in some aquatic ecosystems, conservation importance is correlated with sensitivity (e.g. some kinds of rivers), whereas in others, it may be correlated with robustness (e.g. estuaries).

The trade-offs involved in water allocation are complex in terms of geographical and spatial scale. At the simplest level, trade-offs can be made between supplying water and ecosystem goods and services to upstream versus downstream users. However, these also need to be evaluated at larger scales and internationally. Thus, local optimization may not always provide the optimal national pattern of allocation.

Irrespective of the nature of the ecosystems involved, and thus the types of trade-offs involved in water allocation, it is critical to address the issue of maximizing efficiency of water use in a catchment at the outset. This will not only change the magnitude of the trade-offs involved, but also expand the production possibilities frontier curve, and change its shape towards that of a more robust ecosystem (Fig. 5). In other words, the primary issue to consider is how to obtain the most efficient use of water resources, so that economic returns (monetary and non-monetary) per unit of water consumed are maximized, and externalities per unit output of economic production are minimized. In this way, the opportunity cost of increasing consumptive use value of water will be reduced. This also increases the possibility of increasing economic output without reducing ecosystem health.

caption Figure 5. Hypothetical shift in the production possibilities frontier (PPF) resulting from improved demand and supply management of catchment resources. (Source: Author)

Increasing efficiency is one of the core mandates of integrated water resource management, and involves introducing mechanisms to improve water supply, or to reduce water demand. These goals can be achieved by a variety of means, ranging from regulatory to incentive-based approaches, with latter being the most efficient and cost effective way of reducing water-environment conflicts. On the one hand, approaches include supply management, which aims to reduce water losses through streamflow interception and evapotranspiration, and reduce siltation and pollution. This can be achieved through systems such as pollution permits and incentives such as tax breaks for combating damaging practices. Water demand management is typically achieved through pricing systems, in which higher water prices create an incentive to develop and use water saving behavior and technologies. One of the most promising solutions is provided through systems of payments for ecosystem services. These involve systems of voluntary transactions where a well-defined environmental service such as water provision is bought from a service provider, and where the sale is conditional on service provision. For example, in South Africa, water supply companies pay for the clearing of water-using alien vegetation from mountain catchment areas in order to maintain stream flows. Superimposed on this is the management of the aquatic ecosystems themselves, which can also be optimized to make the trade-offs involved in water allocation more favorable to users of environmental goods and services. The value of many aquatic ecosystems can be enhanced by wise use practices, and this requires solving many of the issues leading to their unsustainable use, such as poorly-defined property rights.

In conclusion, the degradation and loss of aquatic ecosystems is now being recognized to have serious economic and social consequences, and these trade-offs need to be considered in the management of water resources, particularly in countries where there is physical water scarcity. The consideration of the value of these ecosystem services needs to be incorporated into flow assessments and made a prominent part of integrated water resource management. Maximizing the long term value of aquatic ecosystems will require incentive measures to improve water supply, the efficiency of water use, and the sustainable management of aquatic ecosystems.

caption Image by: Florian Fuchs

Further Reading

  • Brown, C. & King, J., 2002. Environmental flows: requirements and assessment. Pp 111-134 in Hirji, R., Johnson, P., Maro, P. and Chiuta, T.M. (eds.) Defining and mainstreaming environmental sustainability in water resources management in southern Africa. SADC, IUCN, SARDC, World Bank: Maseru.
  • Costanza R., d’Arge, R., deGroot, R., Farber, S., Grasso, M., Hannon, B., Limburg, K., Naeem, S., O’Neill, R.V., Paruelo, J., Raskin, R.G., Sutton, P. & van den Belt, M., 1997. The value of the world’s ecosystem services and natural capital. Nature, 387:253-260
  • Department of Water Affairs and Forestry, 1997. White paper on a national water policy for South Africa. Government of South Africa.
  • IWMI, 2006. Comprehensive Assessment of Water Management in Agriculture. ISBN: 1844073963
  • Millennium Ecosystems Assessment, 2003. Ecosystems and Human Well Being. A Framework for Assessment. Millennium Ecosystems Assessment. Washington, D.C. and Covelo, Ca: Island Press. ISBN: 1559634030
  • Pearce, D.W. & Turner, R.K., 1990. Economics of Natural Resources and the Environment. Harvester Wheatsleaf, London, UK. 378pp. ISBN: 0745002250
  • Tharme, R.E., 2003. A global perspective on environmental flow assessment: emerging trends in the development and application of environmental flow methodologies for rivers. River Research and Applications, 19:1-45.
  • Turpie, J.K. & van Zyl, H., 2002. Valuing the environment in water resources management. Pp 85-110 in Hirji, R., Johnson, P., Maro, P. and Chiuta, T.M. (eds.) Defining and mainstreaming environmental sustainability in water resources management in southern Africa. SADC, IUCN, SARDC, World Bank: Maseru.
  • Turpie, J.K. & Barnes, J.I., 2003. Balancing ecology and economics in the multiple use of wetlands on communal lands. Proceedings VIIth International Rangelands Congress, Durban, South Africa, 26 July – 1 August 2003. 1932-1941
  • Turpie, J.K., Smith, B., Emerton, L. & Barnes, J.I., 1999. Economic value of the Zambezi Basin wetlands. Unpublished report to IUCN ROSA – Zambezi Basin Wetlands Conservation and Resource Utilisation Project. 346 pp.
  • Wunder, S., 2005. Payments for environmental services: some nuts and bolts. CIFOR Occasional Paper no. 42.


Turpie, J. (2014). Tug of water: an economic perspective on water and the environment. Retrieved from