Introduction to the Economics of Water Resources: An International Perspective

By Stephen Merrett | Go to book overview

CHAPTER FIVE

Social cost-benefit analysis for water projects

5.1

Introduction

Political economy is a policy-orientated discipline in which the significance of economic inquiry is a function of its relevance for problem solving, including those dilemmas faced by governments. Virtually every central government has some overview on how it sees its distinct economic sectors, such as that of water, developing over time. Within sectors, programmes will be elaborated, and programmes require projects, the cutting edge of economic change.

The provision of government finance for a country's river-basin, water-supply and sanitation activities is always likely to face a budget constraint. It follows that, in choosing one set of initiatives demanding government resources, others inevitably have to be rejected or at least postponed. For example, Kinnersley (1994: xviii) has referred to the competition between irrigation projects and the provision of basic water supplies in some countries. The question then arises, from the point of view of the country as a whole, what is the optimum combination of initiatives to select in any given year? An entire branch of economics, known as social cost-benefit analysis (SCBA), can assist in answering this type of question. SCBA concerns itself with the evaluation of capital projects. SCBA and its application to water projects is the theme of this chapter. The political economy approach to SCBA is “the application of the theory of collective action to public finance”. There is no assumption that the technique is a substitute for politics; rather, it interacts with politics (Schmid 1994:105).

The chapter begins with a brief neutral exposition of the basic method. It then continues with issues specific to SCBA that the economist must confront: the choice of the discount rate, the use of shadow prices, the exclusion of transfer entries, and various estimation problems. Thereafter, the ground shifts to consider whether project analysis can have any relevance to demand management. Lastly, the chapter ends with two case studies and final remarks.

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