Economics in integrated water management

Integrated basin scale analysis that accurately accounts for the impacts of proposed policies on the environment and society's economic welfare can comprehensively and consistently inform water resource policies. Cost benefit analysis (CBA) has considerable potential to support water decisions by consistently appraising proposals in terms of society's total environmental and economic impact in monetary terms. However, the difficulty of correctly applying CBA to environmental programs with complex physical and economic interactions weakens policymakers’ confidence in comprehensive economic assessments at the basin scale. This paper describes and illustrates a method by which costs and benefits can be systematically integrated into an integrated physical, institutional and economic analysis for a river basin. A simple hydroeconomic model is presented. Its size is small enough to build, understand, and interpret with paper and pencil. But its structure is sufficiently flexible to permit expansion for comprehensive policy design that rests on a foundation of a basin's hydrology, institutional constraints, and economic relations. The use of cost benefit analysis to support environmental policy will always be limited by ethical questions on the distribution of benefits and costs among sectors, income groups, locations, and generations. Nevertheless, hydroeconomic models offer a potential resource to efficiently and consistently integrate hydrologic, economic, and institutional impacts of policy proposals to support basin scale cost-benefit environmental assessments.