Challenges to Water Resource Management: The Role of Economic and Modeling Approaches

Abstract

The field of water management is continually changing. Water has been subject to external shocks in the form of climate change and globalization. Water management analysis is subject to disciplinary developments and inter-disciplinary interactions. Are these developments well-documented in the literature? Initial observations in the interdisciplinary literature suggest that results are fragmented, implying that a state-of-the-art review is needed. This paper aims to close such a gap by reviewing recent developments in water economics that address increasing perceptions of water scarcity by looking first at changes in the supply and quality of water and then at the impacts of climate change on water supply extremes. Among responses to such challenges, this paper identifies changes to water use patterns by including and co-managing water from different sources, including surface and groundwater, reclaimed wastewater, and desalinated water. Technological advancements are also among the resources that address water challenges. Water challenges are also reflected in the management of internationally shared water. A recent surge in scientific work identified international treaties as a significant contributor to international water management. This paper reviews recently employed economic approaches, such as experimental economics, game theory, institutional economics, and valuation methods. And, finally, it explores modeling approaches, including hydro-economic and computable general equilibrium models, that are being used to deal with water challenges.

1. Introduction—Water Shocks and Future Projections of Water Availability, Quality, and Use

The water sector faces challenges that are the result of several processes affecting the supply of and the demand for water. These processes are unconnected and pose challenges to water management. On the one hand, climate change affects the quantity and distribution patterns of the water supply, making it harder to plan and allocate water to different uses. On the other hand, climate change alters water requirements for crops, animals, and humans, who respond to increasing heat and evapotranspiration, making the demand for water from these sectors higher and harder to satisfy. In addition, both the naturally increased population and rural to urban migration shift the demand and the demand centers and introduce challenges to planning water supply projects. This paper will start by providing background information regarding these water supply and demand changes.

A closer look at the conditions facing the water sector in many countries around the world makes the observer realize that major changes have been taking place in the supply patterns, the demand configurations, and the use arrangements. For example, using estimates of global renewable water supplies [1,2,3,4,5], Table 1.1 in [6] presents changes to continentally and globally available renewable water resources. Using the global figures, mean global available renewable water resources are 42,780 km³ and range between 39,780 and 44,750 km³ in dry and wet years, respectively. Data in [4] provide estimated and forecasted global water withdrawals that show an exponential increase between the years 1900 and 2015, rising from 570 km³/year in 1900 to 5200 km³/year in 2015. While the available renewable water resources are fairly consistent, intertemporal need for water for different uses will increase due to population growth and alterations to consumer taste, which might be marginally decreased due to technological advancements and institutional changes. The net effect is that much of the world’s total renewable water resources per capita are declining over time in a hyperbolic manner. Due to intensive development and industrialization, the level of pollution of water resources will increase, and water will become less available for various types of consumption. For example, increased salinity in irrigation water makes it less adequate for the irrigation of certain crops, and an increased nitrate load in groundwater from agricultural pollution and fertilizer use makes groundwater use risky for residential consumption. Challenges to these forecasts have been introduced recently in different publications, such as by Boretti and Rosa [7], by developing and applying global models that also account for the effect of climate change, and not only for population growth. Another set of considerations includes alterations to water demand, which is the result of an increase in living standards, and adaptation to water scarcity through technology development and institutions (both of which may not be well-functioning in all countries). In a different approach, a non-parametric framework was applied to analyze seasonal hydroclimatic regimes by classifying global land regions into nine regimes [8]. The regimes are used to assess implications for water availability due to concomitants, changes in mean and seasonal precipitation, and evaporation changes. Future water availability would drastically change across regions of the world. Using the continental population and surface water availability, the per capita water availability in the world and its six continents between 1950 and 2080 is calculated and presented in [9]. The authors suggest that this depends on local (regional) water and production policies that consider societal preferences and priorities for the allocation of available water for food production, urban consumption, and environmental usage.

Where does all of that lead to? In the next subsections, I review the highly dynamic nature of the water sector and the interactions it realizes from global and local conditions. Later in this paper, I will refer to the dynamic nature of water resource management being challenged by these changing conditions and the need to adjust to using new economic and institutional approaches.

What does economics have to offer? Why is it important that economic considerations are part of the solutions? Does water play a role in the growth and development of nations [10,11,12]. As questioned in [11,12], would an increase in water scarcity affect the economic growth of countries? Theoretical and empirical analyses have an inverted-U-shaped relationship with economic growth and the rate of water use. Comparative analysis shows little evidence of severe diminishing returns to water allocated to production, thus resulting in falling income per capita. All it suggests is that the claims of several hydrological-focused studies of a widespread global “water crisis” should be taken with caution. While there is convincing evidence that rainfall variability and water availability have significant impacts on certain sectors, such as agriculture, [10] suggests that evidence of the effect on economic growth and other measures of aggregate economic activity remains inconclusive.

The water sector faces multiple challenges and objectives, including increased water use efficiency and improved conservation, land and other resource conservation, improved food security, and regulated pollution of water bodies from water use in the irrigation and domestic sectors. To address such challenges and achieve the objectives, the water sector realizes different policy interventions, including institutional reforms (e.g., water rights, water trade), pricing, quotas, taxes, and subsidies [6].

Economic models provide a useful framework for the economic value of water and its allocation among various uses. They assess the economic costs and benefits of different water uses and employ this information to guide decisions about water allocation and pricing. Various approaches, such as hydrological and water allocation modelling, can provide insights into the dynamics of water resources management and help forecast water availability under different climatic and institutional scenarios. These models can be used to inform decision makers about water allocation, infrastructure investments, and policies to address water scarcity and pollution.

Several recent papers provide reviews of the role of economics in dealing with water challenges. Work in [13] presents a survey of the literature on the economics of water scarcity and water demand. It provides information on the demand for water in urban, agricultural, and industrial sectors and also the demand for instream water uses. The review provides an overview of what is known about efficient water pricing, water allocation, and water trade. The paper highlights water management issues, such as allocation, to which economics has made important contributions, and areas in which additional research is still needed.

A different perspective suggesting to rethink water economics in light of such challenges is included in [14]. The authors observe that privatization, pricing, and property rights—the conventional economic policy interventions—have not performed well due to their failure to adequately address political economy considerations, including distributional conflicts. The paper identifies specific social and physical aspects of water supply and demand and discusses their implications for three major water policy interventions: water pricing reforms, property right reforms, and projects for infrastructure finance. All of these aspects are a major concern in the sustainable management of water resources under uncertain climate change conditions.

A very useful review in [15] focuses on the role of economic analysis in guiding choices for infrastructure investment and comparing the effectiveness of non-structural regulation approaches to water management. Among the economic approaches reviewed are optimization hydro-economic models (HEMs), economy-wide water–economy models (WEMs), socio-hydrological models (SHMs), spreadsheet-based partial equilibrium cost–benefit models, and others. The paper highlights recent work using WEMs and spreadsheet-based cost–benefit analysis (CBA) models. Other advancements include multicriteria decision analysis and game theory models of noncooperative water institutions.

Under such changing conditions, it is important to compare available sets of traditional and new economic tools and approaches that could be put into action in order to address increased levels of scarcity, water quality deterioration, and water conflicts, to name a few challenges. Several examples can be provided. Starting with the behavior of water users via their water demand functions, econometric tools introduced recently to study demand function estimates allow for the inclusion of hedonic and institutional impacts on the demand of households and farms, which increases the level of explanation of variations in water consumption and allows for adjusting more effective policy interventions. Given the major role that environmental aspects play in the efficient use of water resources (e.g., water quality, environmental services), the development of more advanced and detailed valuation methods allows for more precise estimates of relevant behavioral responses, such as increased willingness to pay for environmental investments and internalization of negative externalities. Another example is the increased ability of hydro-economic models to address more detailed sectoral nuances, international/transboundary water management conflicts, detailed regional environmental issues, and policy interventions aimed at addressing changes in the behavior of decision makers in all sectors.

This paper focuses on a review of advancements in the economics and modeling of water management in the recently published literature. The next section describes the methodology for selecting the publications to be included in this review. Section 3 reviews the various physical changes affecting the water sector in the two recent decades, which are reflected in the number and nature of the reviewed papers. Section 4 shows progress in water management approaches for dealing with local and international water uses. Section 5 reviews progress in the management of international water. Section 6 presents specific economic tools and their contribution to dealing with water issues. It reviews experimental economics, game theory, institutional economic approaches, valuation approaches, and modeling approaches, such as hydro-economic modeling and computable general equilibrium models. In Section 7, all of these advances are linked and assessed for their joint ability to address future challenges in water resource management. Section 8 discusses unaddressed issues and an agenda for future research. And, finally, as suggested and requested by an anonymous reviewer, I took the liberty of providing several personal reflections in Section 9.

While previous published reviews have focused on either sub-disciplines or specific issues, this review provides wide coverage of disciplines and issues. This paper calls for the adoption of an interdisciplinary approach to solving water issues; however, it has its own limitations that should be shared with the reader. This review addresses the role of economics in assessing different types of interventions, such as institutional reforms, taxes, subsidies, and support of water-saving technology adoption. This paper’s objective is to highlight traditional and new economic tools and modeling approaches that could address increased levels of scarcity, water quality deterioration, and water conflicts.

This review includes more than 200 citations of publications mainly from the past 20 years. However, it is obvious that many important and relevant publications may have been missed and do not appear in the reference list.

2. Materials and Methods

The methodology used to identify relevant papers for inclusion in this review is based on both a keyword search and personal expertise. Given the relatively long-lasting experience of the author in the field of water economics, a structured outline of this review paper was first designed, which helped to identify the topics of papers to be reviewed. In addition to this first step, a list of keywords was constructed, including the major topics to be addressed in this review paper, which follows from the list of advancements in water economics that have been experienced in the past two decades (e.g., water and CGE, water and experimental economics, water and game theory, water and valuation economics, etc.). The search was conducted in certain datasets, such as Google Scholar and JSTOR. In addition, references in each paper included in the dataset were also searched and considered.

A total of 756 papers and reports were found and held for further relevancy evaluation (including working papers and book chapters). All records were read by the author. This first screening yielded a workable dataset of 299 publications. The 451 publications that were removed from the initial dataset were less comprehensive in terms of the economic implications of the issues and the methodologies applied. The remaining 299 publications were placed in bins that follow the subsections in the paper’s structure. An additional elimination of papers from the dataset was performed by removing works that were found to be less relevant based on a complete content review. The final usable dataset consists of 213 publications, most of which were published during 2000–2024, but there are also a few from years prior to 2000.

3. Physical Changes Faced by and Introduced by Water Users

As indicated earlier, water users have been facing significant changes in terms of the quantity of, the quality of, and extremes to the supply of water. As a result, water management approaches have to be reconsidered. The following sections identify all observed changes and realize their impact on the tools needed for appropriate water management under the new water reality.

3.1. Changes to Water Scarcity Levels

Water scarcity is lack of a source of freshwater resources to meet the demands of water users for consumption, irrigation, industrial uses, and environmental uses. It can result from quantity shortage or access problems from water suppliers, it may be the result of supply–demand mistiming, or it may be due to water quality problems. Water scarcity affects people in all continents. Water usage is increasing globally and has surpassed the rate of population increase by more than two-fold in the last century, which suggests changes to water consumption patterns by the world population. Such an unprecedented increase in water consumption has many regions facing water scarcity [16]. A distinction between consumptive and non-consumptive use of water may suggest that non-consumptive use patterns (such as by hydropower plants) do not remove water from the natural system and thus do not lead to increased scarcity. However, many non-consumptive patterns introduce time lags and reduce certain quality parameters of the returned water.

An interesting evaluation of the economic consequences of water scarcity in several river basins around the world implementing a Global Change Analysis Model (GCAM) is provided in [17]. GCAM is a hydro-economic model that decomposes the world into 32 geopolitical regions, 384 land-use regions, and 235 water basins. The model incorporates joined representations of the Earth’s climate, hydrologic, economic, land-use, and energy systems in each region. It should be emphasized that water scarcity is measured in the model used in [17] as physical water scarcity according to the water withdrawal-to-availability ratio. Using several climatic scenarios, the GCAM suggests various interesting outcomes of the effect of exogenous impacts of climate-change-induced water scarcity in various river basins. While we are used to a negative effect of water scarcity on economic welfare, the results suggest that depending on the institutional and economic setups, a positive basin-level impact from global scarcity can be realized in certain basins that demonstrate a comparative advantage over others. This comparative advantage can be realized if trade allows a basin to become a virtual water exporter through inter-basin trade and the export of water-embedded goods to other river basins. Such foundations of the hydro-economic models and their important role in addressing policies responding to water scarcity will be further discussed in a special section in this paper.

3.2. Changes to Water Quality

The quality of water resources in the world (both surface water and groundwater) deteriorates over time, which is a major challenge for policymakers in the water sector [18,19,20,21]. The authors in [18] review the types of contaminants, the type of water vulnerable to contamination, and the effects of such contaminants on human health. Contamination of water resources from agricultural pollution of aquifers’ water and waterways, industrial pollution of water resources, and elevated levels of household chemicals in reclaimed wastewater have increased over the years. In irrigated agriculture, this is due to the needs of farmers to compensate for water scarcity, uncertainty in water supply, and increased effects of climate change on agriculture, such as elevated temperature levels that necessitate compensation with more fertilizers. Increased contamination levels in drinking water from different sources resulting from loose regulations directly affect the health of populations consuming such water. Similarly, contaminated groundwater and surface water affect the performance of the water-dependent ecosystems. Increased levels of various contaminants in irrigation water (including wastewater for irrigation) may also affect consumers through the food they consume. Regulation of these negative health and damaging effects vary and have different levels of effectiveness [22].

Mateo-Sagasta et al. [20] describe the extent of various pollution sources (nutrients, pesticides, salts, sediments, and organic matter) in irrigated agriculture and the possible policy interventions, including regulatory instruments (standards), economic instruments (pollution taxes), education and awareness campaigns, and cooperative agreements (tradeable pollution permits), to address them [23]. In addition, Quinn et al. [24] examine a set of decision-support models to address water quality management in real time in different countries and sectors.

Lall et al. [21] focus on the deteriorating quality of groundwater globally. Pollutants originating from agriculture, industry, mining, energy, and legacy landfills increase the threat to groundwater. The authors suggest advances in modeling and data collection techniques (e.g., satellites) to support better management of water quality in aquifers around the world.

3.3. Impacts of External Shocks (Droughts and Floods)

With climate change intensifying and altering the distributional patterns of different types of water both temporally and spatially, it is anticipated that hydrological events will be characterized by higher frequency and intensity. Heavy rainfall, extreme floods, and droughts will increase. These extreme hydrological events may result in catastrophic effects on individuals (deaths) and communities (destruction of infrastructure). Economic evaluation of such effects and the possible approaches to managing natural resources under catastrophic events have been studied in [25,26], who examined the theoretical foundations for dealing with any catastrophic event, including droughts, and in [27], who focused only on drought impact assessment and handling.

3.3.1. Droughts

Drought differs from other disasters, and especially water-related disasters, in that it is a continuous phenomenon rather than having a short effect that strikes in a specific location (e.g., wind, flooding). Drought is a complex natural hazard because it does not have a universal yardstick. Drought conditions may vary depending on the region [28]. Different definitions of drought reasoning include meteorological, hydrological, agricultural, and socioeconomic causes [28,29]. In addition, there are different kinds of drought impacts—direct, indirect, and intangible. Each type (or combination of impacts) requires certain estimation methods and different policy intervention tools. Droughts not only affect the agricultural sector but also regions beyond the drought-stricken area, and sometimes the entire economy is affected [30]. In many cases, the indirect impacts of droughts could be more substantial than the direct impacts, affecting other industries and production sectors and seen along supply chains [31]. For example, drought can affect hydropower generation and, through the loss of the electricity supply, the production of food and other inputs for various production sectors of the economy, leading to a significant impact on the country’s gross domestic product [32].

Several analytical frameworks have been suggested to attempt to measure the economic impacts of drought. Freire-González et al. [33] propose a conceptual framework based upon two sources of economic impact, “green water” and “blue water,” arguing that because each source affects the economy in different ways, their impact assessment must be differentiated.

Additional studies discuss the impact of climate change on the severity and frequency of droughts and the resulting economic losses. Estimates in [34] suggest that with no climate mitigation or adaptation, losses from droughts in the United Kingdom and the European Union could reach more than € 65 billion per year at the end of the century, compared with € 9 billion annually at present. From a different perspective, Gil et al. [31] measured the direct and indirect effects of drought. They used a direct attribution model to measure direct effects and a nested indirect attribution model to measure the indirect effects. The impact of water scarcity impacts from agricultural production on the macroeconomy is measured through chained elasticities. While the ample literature on drought effects on rural regions provides a good understanding of the social effects of this disaster, fewer studies have been focused on the urban sector. One example is the work in [35], which used monthly labor force data from 78 cities in Latin America to show the negative impacts of droughts on urban employment and income. The authors find that the negative impact of droughts is even larger than the impacts of flood events affecting these cities. Another line of work estimates the role of policy interventions to reduce the negative impact of droughts. For example, Booker et al. [36] applied a basin-level model to the upper part of the Rio Grande river basin to test whether institutional adjustments can reduce drought damages. The findings suggest that damages from future droughts could be reduced by 20% and 33% per year through intra- and interstate water markets, respectively, which would allow water reallocations across water-using regions affected differently by drought.

3.3.2. Floods

Several studies were published recently that refer to the economics of flooding. Flooding is the “opposite” side of the extreme effects of climate change and differs from droughts by having a more targeted and short impact duration. Allaire [37] provides a review of the economics of flooding in recently published work.

Sun et al. [38] argue that in addition to the significant flood damage to an area, such as effects on the local economy, disrupted transportation, and damaged infrastructure, longer-term impacts and recovery occur within that area and as a result of the interaction between neighboring areas during the recovery process. The authors estimated the short- and long-term impacts of different scales of flood events on employment and business start-ups in different sectors of the economy. The findings indicate negative short-term impacts on the agricultural sector and particularly on small establishments. On the other hand, the findings suggest positive impacts on the service sector. Tonn and Czajkowski [39] evaluated the inland flood risk in fluvial and pluvial plains from water ponding and insufficient drainage in urban areas. Pluvial and fluvial flooding are sometimes lumped together for purposes of modeling, insurance, and risk management. But, the authors treated pluvial and fluvial flooding separately due to key differences that exist in the damage associated with these types of inland flooding. Floods originating from tropical cyclones have a higher percentage of pluvial flood insurance claims and higher average pluvial damage than non-tropical cyclone floods. For example, analyses of damage claims related to Hurricane Harvey in 2017 show that locations with higher-than-expected damages tend to have high percentages of pluvial claims. Pluvial flooding and its local nuances exhibit the potential to reduce the accuracy of catastrophe models of expected flood damage.

An interesting aspect of flood damage is its indirect impact on the daily activity of the affected population. Ahmed et al. [40] identified short- and long-term negative effects of the 2010 colossal flood on the educational outcomes of children and adolescents in the flooded districts of Pakistan. They used a difference-in-differences approach to compare flooded and non-flooded households before, during, and after the flood, using household survey data. The findings suggest that the educational outcomes of children and adolescents in flooded households in rural areas were severely affected by the flood compared with their peers in non-flooded areas. And, finally, Allaire [41] identified effective strategies for mitigating and coping with losses from flooding. She compared two intervention policies—subsidized insurance and ex post compensation—in a theoretical model applied to the case of flooding in Bangkok. The findings imply that a policy intervention that increases the uptake of subsidized flood insurance does not deliver higher net social benefits relative to the status quo compensation program.

3.4. Changes in Use of Water Sources (Surface Water, Groundwater, Reclaimed Wastewater, and Desalinated Water)

Market conditions, such as changes in the relative prices of goods or inputs and changes in consumer tastes and preferences, could lead to changes in use of the type of water for certain economic activities (irrigation or urban consumption). Water resources with the potential for trade-off, depending on water prices and qualities, include surface water, groundwater, reclaimed wastewater, and desalinated water. Several studies have dealt with single water source use, while other studies focus on the opportunities associated with conjunctive use of various types of water, such as surface water and groundwater, surface water and reclaimed wastewater, and even a conjunctive use of all types of water.

Esteban [42] reviewed the challenges faced by groundwater (GW), including climate change, its role in supporting GW-dependent ecosystems, the effectiveness of regulatory interventions, and the impact on land subsidence. Indeed, GW is a resource threatened by both malmanagement of aquifers and external shocks due to climate change [43,44,45]. Given the “future as usual” behavior characterizing GW management, it is most likely that many locations on Earth would face extreme water scarcity [46] and damages from land subsidence caused by long-term pumping of groundwater [47].

In addition to studies that estimate the status of groundwater aquifers and changes in their water stock over time, other studies focus on the behavioral consequences of users and the effectiveness of policy interventions [48,49] in the case of groundwater-dependent ecosystems.

A large body of the literature addresses groundwater management options and their advantages and disadvantages. Esteban and Dinar [50] evaluated the ability of cooperative management of an aquifer to deal with over-pumping and damage to groundwater-dependent ecosystems, while Molle and Closas [51] evaluated co-management options to manage an aquifer. Some of the work in this group evaluated policy intervention means. Esteban and Dinar [52] modeled the effects of the packaging and sequencing of pricing and quota interventions on both the stock of the GW and the welfare of the users. Several studies refer to the role of environmental flow services from groundwater. Pereau et al. [53] compared, under various conditions, the outcomes of an optimal control approach (environmental flows are introduced as an externality) with the outcome of an approach in which environmental flows are modelled as a constraint to be satisfied. An interesting analysis of the reduction of GW loss due to water uptake by an invasive tree is provided in Pongkijvorasin et al. [54], who provided decision rules to trigger the removal of the invasive tree. A technology that has recently gained popularity is the technology of managed aquifer recharge (MAR), which allows for recharging aquifers with different types of water. In developing an MAR model for a region in California, Reznik et al. [55] demonstrate that intentional recharge is of high benefit to the region, potentially increasing groundwater levels in that region by an average of 20% over a 20-year horizon.

As suggested and proven by Dinar and Tsur [6], different types of water and different water-using sectors should be considered jointly for handling water issues and for finding socially acceptable solutions to water issues. The following are several examples for the conjunctive use of surface water, groundwater, and reclaimed wastewater. Economists have long advocated for integrating reclaimed wastewater in irrigated agriculture to achieve surface water conservation and to reduce environmental pollution from the disposal of residential sewage to the environment. Reznik et al. [56] developed a multi-sectoral model of water quantity–quality interaction among the urban, agricultural, and environmental sectors of a region. They formally constructed sufficient conditions that support the superiority of infrastructure development and the conveyance of reclaimed wastewater for irrigation compared with other common disposal alternatives. In more empirically-based work, Reznik and Dinar [57] applied the framework in [56] to a particular region in California while accounting for limiting factors, such as the availability of natural water resources and regulatory constraints concerning wastewater discharge. While they find reuse for avocado crop irrigation nonprofitable, utilizing that practice to support the agricultural economy in the region is still economically inexpensive and could be feasible under a set of circumstances that are most likely noticeable in the region. Wastewater treatment cannot be addressed without introducing considerations of climate change. Climate change does affect the cost of wastewater treatment and its inclusion in future investment plans for wastewater treatment. Reznik et al. [58] found evidence that climate change has an impact on wastewater treatment costs using a unique dataset from China. Their work also simulates the potential impact of future policy interventions and climatic scenarios on treatment cost.

A resource that has increased in importance in certain locations around the world is desalinated sea (or brackish) water. Not too many studies exist on the economics of desalination and the use of desalinated water for irrigation. Economic considerations are essential for dealing with desalinated water for any use (either for urban use or for irrigated agriculture). Younos [59] provides an overview of factors that determine desalination cost while addressing various cost factors based on a review of case studies in the available literature at that time. More location-relevant studies are also reviewed. The desert countries in the Arab region, such as Saudi Arabia, initiated irrigation of crops with desalinated water. This was seen at the early stages as an infeasible practice, but as water became scarcer, more and more of such practices are seen in the region. Sewilam and Nasr [60] describe the process of expanding desalinated water use for irrigated agriculture and the economics of such a practice in the Arab world. Kaner et al. [61] developed and applied a biological–physical model of crop response to salinity coupled with economic calculations of farm-level costs and benefits to determine the impact on crop yield of irrigating with desalinated water in Israel. The value of the yield was then compared with the economic feasibility of investing in farm- or regional-scale desalination plants to supply high-quality water as an alternative to irrigation with brackish water, which is available in the region. The results suggest that the predicted profit from the production of high-value, salinity-sensitive crops irrigated with either pure desalinated or blended desalinated and local brackish water justifies the desalination cost for agriculture at present market prices.

Technology adoption and use in water-consuming economic activities have long been at the center of addressing water scarcity and quality challenges. The next section focuses on the economics of technology use to conserve water and sustain economic productivity.

4. The Role of Technological Advancement in Addressing Water Resource Management Challenges

Technological advancement is one of the strategies to cope with water quantity and quality challenges. Governments and the private sector invest in technology development and in their wide adoption by water users in various sectors. The next three sections will address the technical and economic feasibility of water-saving and pollution-reduction technologies and new studies on the adoption of such technologies by water consumers in the agricultural and urban sectors.

4.1. Feasibility of Water-Saving Technologies and Pricing

Studies on the feasibility of water-saving technologies are a significant first step in the economic assessment of the possibility of new technologies and/or management practices to produce economically credible flows of benefits from water savings while keeping production (in agriculture) or satisfaction from water usage (in urban uses) at levels that will lead to a positive benefit/cost ratio. Inman and Jeffrey [62] conducted a review of residential demand-side management (DSM) frameworks that aim to conserve water in various household types under varying economic and climatic conditions. The tools include financial approaches (metering, pricing), technological tools (indoor, outdoor), educational approaches, operations and maintenance tools, and regulations. The paper also compared the implementation costs and effectiveness of the demand-side management tools and approaches.

Several representative studies include reviews of the literature and several case studies, and they all provide a methodological framework and evidence for the relevance of the approaches used. Perry and Steduto [63] found that very few examples exist of carefully documented water-saving impacts of high-tech irrigation. Their conclusion is that introducing high-tech irrigation in the absence of controls on water allocations will usually lead to increases in water consumption per unit area, increases in the irrigated area, and increases in the amount of water extracted and applied. Pérez-Blanco et al. [64] reach a similar conclusion, finding that irrigation-efficient technologies should not be viewed as a tool for water saving but rather as a means of increasing agricultural water productivity and farmers’ net benefits in regions facing water scarcity. Ward and Pulido-Velazquez [65] demonstrate that the adoption of more efficient irrigation technologies reduces valuable return flows and limits aquifer recharge, hence increasing water scarcity. They used an integrated basin-scale analysis linking biophysical, hydrologic, agronomic, economic, policy, and institutional dimensions of the Upper Rio Grande Basin. Similar findings, namely that higher efficiency rarely reduces water consumption, were reached by Grafton et al. [66], who showed that increases in irrigation efficiency to mitigate global water scarcity must be accompanied by several additional measures, such as comprehensive water accounting and measurements, a cap on extractions, an assessment of uncertainties, valuation of trade-offs, and a better understanding of the incentives and behavior of irrigators. These findings are similar to those reached by Dinar and Zilberman [67] when evaluating the economic consequences of resource-conserving, pollution-reducing technologies. By coining the concept “expansion effect,” they introduced consideration beyond the field level and the interaction between water scarcity and water quality. Depending on the relative limiting factor (quantity–quality), they argued that modern (resource-conserving) technologies could incentivize the conservation of water resources if combined with appropriate policies of input and output price control and regulations on pollution [67] (p. 346).

Several studies introduce a benefit/cost analysis of the financial/economic feasibility of water conservation irrigation systems under local conditions. Siderius et al. [68] developed a modified traditional cost curve approach with an improved estimation of demand and the increasing marginal cost of water conservation while also correcting for impacts on downstream water availability. The framework was applied to three major water-stressed river basins—Indus, Ganges, and Brahmaputra. The results indicate that at the basin level, the equilibrium water price is too low to make many of the water-saving measures cost-effective. Vatta et al. [69] assessed the impact of tensiometer technology on the consumption of groundwater and electric power in paddy cultivation in Indian Punjab and its subsequent economic benefits. Their analysis suggested that compared to the present continuous flooding and furrow irrigation methods, the tensiometer-based application of irrigation water enables the reduction of water and power consumption without any yield loss. A summary of water conservation study findings can be found in

Table 1. Studies on water conservation and their findings.

Published Article	Findings
[67]	Water-saving technologies could provide incentives to conserve water if combined with appropriate input and output pricing policies and regulations on pollution.
[62]	Relative effectiveness of different DSM water-saving tools in the residential sector.
[65]	Adoption of more efficient irrigation technologies may reduce return flows downstream and limit aquifer recharge, hence increasing water scarcity.
[63]	Introducing efficient irrigation without regulation of water allocations will usually lead to increases in water consumption per unit area, expansion of the irrigated area, and increases in the amount of water extracted and applied.
[66]	An increase in irrigation efficiency must go hand in hand with an arsenal of regulations, including water monitoring, caps on water extractions, an assessment of uncertainties, and an assessment of possible trade-offs.
[69]	Tensiometer-based irrigation reduces water and power consumption without any yield reduction for rice irrigation compared to the presently used continuous flooding and furrow irrigation methods.
[64]	Water conservation technologies should not be seen as a tool for attaining water conservation but rather as a means of increasing agricultural water productivity.
[68]	The basin-level equilibrium water price is too low to make many of the water-saving measures cost-effective.

.

Another strand of the literature, mentioned here very briefly, has focused on the effectiveness of different tariff designs to achieve water conservation and the trade-offs between economic efficiency, equity, and cost recovery [70]. Using a hypothetical community served by a water utility, the authors analyzed how moving away from a uniform volumetric water tariff to an increasing block tariff (IBT) affects households’ water use and water bills, and how such changes affect equity and economic efficiency. An investigation of the behavioral aspects of responses to water tariffs in a survey about implementation [71] provided mixed evidence on the effectiveness of IBTs in conserving water.

The approaches used to identify and prioritize technological advancements and regulations to conserve water have generally provided a good foundation for addressing challenges associated with water scarcity in the irrigation and urban sectors. The ability to replicate approaches applied in one location to other locations, as we see in this review, is an indication of a good and relevant approach.

4.2. Feasibility of Water-Pollution-Reduction Technologies

Pollution-reduction technologies could include residential wastewater treatment or irrigation-related chemical return flow pollution-reduction technologies. Goffi et al. [72] compared the economic feasibility of 37 wastewater treatment technologies while considering cost indicators for selecting the “ideal” technology by fitting it to specific features in cities. Using the criteria of net present value and annualized net present value, they prioritized the evaluated systems. In the agricultural sector, leaching from the fields of the irrigated agricultural sector is often the dominant source for aquifer recharge in groundwater basins in semi-arid regions, but fertilizers and other agro-chemicals may degrade the quality of groundwater. Mayzelle et al. [73] compared the feasibility of two low-impact crops—alfalfa and vineyards—and new recharge basins as a new alternative land use serving as recharge buffer zones around communities facing contaminated groundwater in the southern Central Valley of California. Buffer zones would maintain the economic integrity of the region and align with prevailing water quality regulations.

Technological advancements to cope with water quality deterioration and to allow for reasonable regulation for the regulator and the polluters (or potential polluters) do exist, and they serve well the need for sustainable water quality across the various sectors. Economic analyses using various criteria have demonstrated the usefulness of the existing techniques and approaches. Yet, the complexity of water pollution processes, especially in large watersheds, points to a need for more work in the direction of creating simpler tools and estimation procedures.

4.3. Adoption of New Technologies (Residential and Agricultural)

The technological and economic feasibility of new technologies do not guarantee their implementation by water users. The following studies report the determinants of the adoption of technologies that save water both in irrigated agriculture and by households and the adoption of technologies that reduce pollution.

A study by Schaible and Aillery [74] in the United States found that despite the availability of technological innovations, nearly half of U.S. irrigated cropland acreage is still irrigated with less-efficient, traditional irrigation application systems. Studies on the adoption of irrigation technologies, such as the ones cited below, may explain why. de Witt et al. [75] investigated farmers’ personal barriers toward a water-scheduling technology that was developed and provided free of charge by the government. The non-adoption of the free service was explained mainly by the cost (including time) associated with the technology’s initial setup, application, and interpretation of water scheduling information by the users. Gui and Gou [76] explained regional differences in the adoption of technologies to employ alternative water sources for different domestic uses. One of the important findings is that adoption mechanisms of water technologies in rural and metropolitan areas differ, and thus both technologies and policies aimed at affecting distributional impacts should be different for each type. Given the high share of domestic water consumption across the irrigated landscape (in Florida and California), Ref. [77] studied the adoption of urban landscape water conservation innovations in Florida to find major differences in the speed of adoption among households in different societies. The results suggest opposite processes of diffusion of water-saving technologies across the different societies, which leads to a recommendation for different dissemination strategies.

A different approach to measuring the adoption of water-saving technologies has considered a process of adopting not one technology but rather a bundle of technologies that benefit each other. For example, using drip irrigation could be made much more effective if a fertilization technology takes advantage of the precise water allocation via the drip system. In a study focused on avocado growers in California, [78] showed how a variety of irrigation technologies bundled with different water management practices help growers through periods of limited water supply and elevated salinity levels. And, yet another example of bundling irrigation water sources was demonstrated in [79], which evaluated the benefits to irrigated agriculture in California from having access to a portfolio of water sources, each characterized by quantity, security (water right), and quality (salinity content). As in other cases of bundled technology adoption, while the limited amount of water, lower-quality water, and less-reliable water supply all negatively impact agricultural land values, holding a water (bundle) portfolio positively impacts land values through its role in mitigating the negative aspects of these factors and reducing the sensitivity of agriculture to climate-related factors.

The existing economic approaches to assessing the determinants of adoption of new water-using technologies and to quantifying their adoption coverage over time are more complicated and hard to assess vis a vis their ability to address the needs of policymakers. One explanation for a relatively lower rate of success in our modeling and economic approaches in the field of adoption is the need in adoption analyses to rely on good data. Unfortunately, data on the adoption of water-related technologies are not readily available, and thus the quality of the data dictates the capacity of the approaches and models to provide reasonable and useful results.

So far, this review has referred to domestic water challenges and economic approaches to address them. The next section introduces an issue—international water—with rising importance in the regional management of water resources.

5. Management of Internationally Shared Water

International river basins are water bodies that are shared among more than two riparian states. As of the 2019 update, 310 international river basins cover nearly 47% of the global land area [80]. With such a major mass of land, dealing with the management of international water may have a wide impact globally, and it is of interest to various disciplines dealing with international water, such as economics, engineering, political science, international relations, international law, and combinations of these disciplines. The literature on the management of international water has seen much collaboration among scholars from these disciplines, as was summarized in [81,82].

One of the most effective arrangements for dealing with international water is the treaty tool, which is used among riparian states to address different aspects of water management in the basin (e.g., allocation of the water, allocation of benefits and costs, and regulation of pollution). The analysis of international treaties has gained momentum in the literature, allowing economists and political scientists to join forces in addressing research on the efficiency of such treaties. Recent developments in the roles of treaties for the cooperative management of international water were discussed in [83]. The author said that treaties provide states with a platform for dealing with conflict at the basin level in addition to having the means to produce benefits for sustained cooperation in the basin.

Given the economic–political nature of cooperation in international river basins, joint work by economists, engineers, and political scientists is most adequate to address issues of water management on a basin scale. A sample of recent works that highlight different angles of the issues faced by riparian states follow. One of the obvious observations highlighted by many researchers is why there are so few agreements on international water. To answer such a question, Ref. [84] developed an economic–political framework to explain the likelihood of treaty formation in international river basins with a different number of riparian states. They used the interaction between the transaction cost theory and the economies and diseconomies of scale theory to explain the likelihood of expanding a coalition of collaborator states in a large basin. Several important findings suggest that higher transaction costs increase the probability of treaties for environmental regulation, and greater economies of scale in the issue under cooperation lead to fewer numbers of treaties that address environmental regulation. Transaction costs increase the likelihood of treaties that address water allocation, but economies of scale have the opposite effect. Transaction costs tend to reduce the number of issues to be included in the treaty, while economies of scale tend to increase this number. Higher transaction costs of negotiation tend to increase the number of institutional mechanisms incorporated in a treaty, and greater economies of scale of the project under negotiation increase the number of treaty institutions.

The above findings confirm the results in [85], who investigated the impact of the negotiation context on the treaty content, as was already suggested by [86,87]. The latter two publications highlighted the importance of the transaction costs of negotiating and sustaining treaties, along with the need to invest in institutional design in order to account for transaction costs.

Global analyses of treaty performance were conducted in [88] for all bilateral river basins and in [89,90,91], which focused on the effectiveness of water management during climate change in terms of cooperation. The conclusions from all of these studies showed that well-designed and well-crafted treaties can create stable arrangements under extreme climatic conditions.

Another important aspect motivating cooperation among states was identified in [92] in the case of differences in the power, attitude, and capacity of riparian states with regard to the environment and environmental pollution. Asymmetries in concern for the environment, or the ability of the parties to abate pollution, are most likely the result of economic differences and influence the willingness to pay for pollution abatement. While such differences could result in tensions, they can incentivize states (most likely richer and more developed states) to encourage cooperation in the basin.

A strand of research uses the concept of issue linkage to allow for pulling the parties in a deadlocked conflict to move to a cooperative solution. Several works [93,94] have identified the theoretical advantages of issue linkage, and others have demonstrated its application in the case of the conflict over the Mekong River Basin between China and the lower Mekong States (Laos, Cambodia, Viet Nam, and Thailand) [95,96,97].

Other works have focused on the role technology plays in addressing conflict in river basins facing high water scarcity via exchanges (linkages) between water and energy [98] and via the production of new desalinated water in exchange for traditional surface water [99].

Cooperation can also be challenged by the allocation arrangements of incremental costs or benefits from cooperation to the participating parties. More on that can be found in Section 6.2 (game theory), which is part of a broader section that introduces economic tools, such as experimental economics, game theory, institutional economics, valuation methods, and modeling approaches (such as hydro-economic modeling and computable general equilibrium modeling).

The interaction between legal, political, and economic disciplines in recent cases of analyses of international water issues (management, conflicts, agreement, pollution, allocation, etc.) has introduced important opportunities for strengthening the solutions to water management challenges in international water. The interdisciplinary collaboration between political scientists and economists has opened the door to more quantitative descriptions of approaches to conflict and negotiation and demonstrations of the opportunities for cooperative solutions to regional (basin-wide) water problems.

6. What Do New Economic Tools and Approaches Have to Offer?

Recent developments in software and computer capacity have given rise to the use of several economic tools and approaches in the analysis of integrated water resources management (IWRM), which was less apparent in previous decades. The increased use of experimental economics, game theory, institutional economics, valuation methods, and different modeling approaches, such as hydro-economic models (HEMs) and computable general equilibrium (CGE) frameworks, will be reviewed next.

6.1. Experimental Economics

Experimental economics is a relatively new field that has been applied in recent years to issues related to policy evaluation for water management under conditions of scarcity, deteriorated quality, and external shocks, such as climate change. A recent review of the role of studies applying experimental economics to evaluate policy reforms in the water sector [100] suggested that experimental economics, either by itself or in conjunction with other approaches, can save society the grievance of the high social costs of failing policy implementation. Evaluation of policy reforms using experimental means can be performed in the lab or in the field prior to the actual implementation of the policy. The challenge faced by experimental economics, as identified in [100], is the need to consider how scaling up the proposed policy interventions can remain relevant rather than creating or exacerbating societal disparities and ethical challenges stemming from the externality addressed. This includes studies on establishing water markets and increasing water conservation, works assessing the improvement of water use under conservation regulation in different sectors, payment for water-related ecosystem services, and emissions trading to regulate water pollution reduction.

An earlier review of advantages and challenges in experimental economics applications to water sector issues [101] addressed the role of experiments in advancing economic understandings of water resource issues. The review included works focusing on self-regulating behaviors in common-pool resources (groundwater), the efficiency of alternative water quantity and quality markets, the comparative efficacy of alterative types of ambient pollution control instruments, and water conservation measures.

A hand-picked set of works presented in [100,101] and elsewhere are summarized in

Table 2. Recently published works on water and experimental economics by issue.

Published Article	Policy Focus	Issue Addressed
[102]	GW regulation	Water conservation
[103]	Residential water
[104]	Water conservation regulation
[105]	Smart water markets	Water markets
[106]	Water markets and instream values
[107]	Water quality trading
[108]	Agricultural subsidies to regulate water quality
[109]	Electricity subsidies and GW level	Subsidy regulations
[110]	Electricity subsidies and GW level
[111]	Electricity subsidies and GW level
[112]	Collective action for watershed management	Watershed mgt.
[113]	Issue linkage	International water

. While experimental economics is growing in its coverage of water issues, the table below identifies five major issues for which experimental economics approaches are reported in this review, including water conservation, water markets, subsidy regulations, watershed management, and international water [102,103,104,105,106,107,108,109,110,111,112,113].

Experimental economics has a major role in the design and evaluation of policies in the water and environmental sectors aimed at internalizing or mitigating the effects of negative externalities. However, Banerjee [100] argued that experiments have to take into account that policies do not operate in a vacuum. Therefore, for an experimental design to be relevant, the context of the analysis is important. Context may include the institutional setting, the social and political settings, and the physical setting.

6.2. Game Theory

Game theory approaches have been applied to deal with water resource management given that water is a common-pool resource subject to strategic behavior. As climate change is expected to result in water scarcity and the deterioration of water quality around the world, water quantity and quality are becoming key challenges for water managers and for nations that share limited water resources. The literature has seen an increase in published works on the use of various game theory frameworks at local regional and international setups. Publications, such as [114,115,116], have provided collections of studies that apply game theory models to various types of water issues at various levels, including local, national, and international levels. A review of works that apply game theory models spanning the years 1940 through 2014 can be found in [82].

Game theory studies apply cooperative and noncooperative frameworks and consider their relevance to various water management issues. Several of the studies have referred to domestic conflict situations among sectors or regions [117,118], and others have referred to water issues in international river basins [119,120,121,122,123,124,125,126,127]. All of these works have referred mainly to the allocation of scarce water. Some works [124] have developed basin-level hydro-economic models to estimate the benefits and costs of the various basin riparian states. Others [121] have calculated the coalitional benefits and costs outside of the game theory framework and then incorporated the calculated values into the game theory allocation equations.

To be more specific about the contributions of several of the studies cited in the previous section, Ref. [117] compared the outcomes of two analytical frameworks set to optimize scarce water allocation between agricultural production and environmental consumption. The two analytical frameworks—a cooperative game theory and negotiated role-playing—were applied to a river basin in South Africa. The authors concluded that the role-playing negotiated framework has more flexibility to incorporate real-world situations and thus to provide more options for the stakeholders to consider in their allocation challenge.

The works by [119,120] developed a basin-level game focusing on geographies that can affect the stability of the allocations. The former work suggested measures of equity among the participants in the simplified game, while the latter work was more realistic in the sense that it reflected conditions in the Amu-Darya river basin and actual agreed allocations among the several riparian states under scenarios of high water scarcity that this basin faces.

Pham Do [128] identified challenges facing game theory, as well as opportunities that game theory can address, to help water managers achieve sustainability, equity, and optimal conditions. An interesting part of the paper deals with distinguishing between cooperative and noncooperative game models and static versus dynamic game models. I will refer only to the latter classification.

Both cooperative and noncooperative games can be classified as static or dynamic. They differ in the timing of decisions that are made by the players. Participants in static games consider the immediate action of the opponent player, while players in dynamic games consider the responses by the opponent players following their own decision. In static games, all participating players choose their strategy at the same time. The static approach has been developed and applied to decision making in WRM, including groundwater resource management [129,130,131]. Players in dynamic games can move with their strategy sequentially or repeatedly. Dynamic game models have been developed as both discrete and continuous. The dynamic approach (for both theoretical and empirical analyses) has been recently applied to multipurpose water projects [132,133] and the analysis of spatial groundwater management and policies [134].

In recent years, we observe a surge in works applying game theory to situations reflecting the impact of climate change on water resources [135]. The authors of the publication demonstrated the use of the Nash bargaining solution with two methods, a symmetric and an analytic hierarchy process (AHP) method, for allocating water of a higher level of scarcity to users. The AHP method provided superior outcomes for players compared to the symmetric method. The results suggest that water allocation can be achieved more efficiently by using a cooperative bargaining game.

In a different study focused on the Colorado river basin [136], the authors applied a bankruptcy game framework to allocating climate-induced, over-committed water rights agreements to competing stakeholders from different sectors in the Salton Sea region. They used two models for allocation: one involving a social planner approach that maximizes regional welfare, and the second model focusing on the bankruptcy rules of (a) proportional deficit (cutback) and (b) constrained equal award. The findings suggest that the proportional cutback framework is less favorable to regional welfare, although it presents a more politically feasible and robust option.

Game theory modeling has demonstrated an ability to address cooperative and noncooperative aspects of water resource management situations. However, the capacity of game theory to provide “operational” suggestions to water managers has been limited by the intensive computational needs of the algorithms developed. An example of such computational intensity needed for making the game theory results useful for managers can be found in [137]. The authors referred to a heterogeneous project both in terms of the landscape of the region under development and the nature of the players (size, land use), both of which lead to a more complicated set of cost allocation mechanisms than in homogeneous projects. The analysis presented in the paper used cooperative game theory to apply schemes for sharing costs and revenues from a project involving various non-homogeneous beneficiaries in an equitable and fair way. The proposed approach was applied to the West Delta Irrigation Project in Egypt. It utilized the Shapley Value to develop a differential two-part tariff that reproduces the allocation of total project costs. The proposed differential tariff, applied to each land section in the project, reflected their landscape-related costs. Such a differential tariff would be preferred by the users in the different land blocks of the project. It contrasts the unified tariff that was proposed, using the traditional methods, in the project planning documents of the government agency.

6.3. Institutional Economics

The analysis of water institutions has been growing in recent years. Failing or malfunctioning water sectors have been challenged with a need to improve their institutional performance. Most of the published work is descriptive and attempts to explain why some institutional arrangements have worked in some instances but failed in others. For example, Ref. [138] examined frameworks to improve performance in irrigated agriculture, such as coordination arrangements, and policies promoting government agencies, user organizations, and water markets. Questions, such as how to measure institutional success, have rarely been answered. Most water institutional analyses have been conducted using the case study approach, so extrapolation from one location with certain conditions to another location with different conditions was impossible.

Decentralization is one of the institutional reform interventions attempted in recent years in many water systems, such as river basins. The literature has mainly described the process rather than explained its determinants. A quantification of a global institutional reform focusing on the process and performance of decentralization reforms in river basins in 83 and 27 river basins around the world was performed in [139,140], respectively. The studies estimated the contribution of local conditions and supporting policies to the effectiveness and speed of the reform and identified the level of success as a function of conditions in each of the basins.

In two separate studies, Refs. [141,142], the authors applied quantitative models to decompose water institutions in 43 and 17 countries around the world, respectively, for a comparative analysis of the performance of their water institutions. And, Ref. [143] developed diagnostic models applied to 87 poor countries to find that water-related public services contribute to per capita GDP and to improved public health results across these developing countries. The relationship between the wellness of the water institutions and the performance of the economy were also shown in [144]. Maria-Saleth and Dinar A. [145] applied the analytical framework developed in [141] to quantitatively estimate the structural and functional linkages within institutional structures and to indicate their performance effects and strategic importance in the process of promoting institutional reforms. Bandaragoda [146] built on the suggested framework in [141] (which was published in a couple of World Bank working papers and technical papers [147,148]) and developed a qualitative framework to analyze water resources management institutions in the context of a river basin.

To promote the important analysis of water institutions, Berbel et al. [149] dedicated a special issue to this topic in which they demonstrated the role of institutions during scarcity and drought situations. In a similar vein, authors in [150] quantified the significant components of water institutions and their effect on different aspects of water sector performance under scarcity and degraded water quality in India.

6.4. Valuation Methods

Recent years have brought a significant increase in publications that focus on environmental valuation [151]. Some argue that this is the result of global change affecting vulnerable water resources but also increasing their attributes, which can benefit different segments of society. Globalization has made it easier to move along the attribute spectrum due to advances in the availability of technologies that can help alter water quality and make it usable for different purposes. Another reason for the increased weight of valuation methods is the objective of increased water efficiency by maximizing the value of the resource as water becomes scarcer. Environmental valuation has an important role in informing the development of standards for water used for different purposes, such as drinking, irrigation, and water-dependent ecosystems. In addition, environmental valuation can inform optimal investment in water treatment, such as the net benefits of desalination, the treatment of recycled water, and managed aquifer recharge, to name a few.

For obtaining values associated with global changes to water demand, water supply, and water quality, valuation methods also need to rely on non-market values. As such, valuation requires the use of either indirect valuation approaches (such as travel cost, hedonic pricing, and defensive expenditures) or direct survey techniques (contingent valuation and choice experiments) [152,153].

The use of valuation methods has seen a strong boost with the unfortunate, well-known Exxon Valdez oil spill on the shores of Alaska on 24 March 1989, causing nearly 11 million gallons of crude oil to spill into the ocean [154]. Since then, valuation methods have been used to assess damages of other oil spills [155,156], as well as in the assessment of values of the environment resulting from development projects. For example, Ref. [157] conducted an ex ante benefit–cost assessment and forecasted market-clearing prices and quantities for ecological infrastructure investment contracts in the Panama Canal Watershed. In another example, [158] assessed the extent of altruism vs. self interest in the valuation of community drinking water quality improvement investments in Canada. Finally, [159] compared the contingent valuation and choice experiment methods in developing solid waste management projects in Macao.

Johnston et al. [160] proposed current best-practice approaches for stated preference (SP) studies. These recommendations consider the use of SP methods to estimate both use and non-use (passive-use) values. They covered a broad SP domain, including contingent valuation and discrete choice experiments.

Valuation methods are not innocent of problems or caveats. Some of the issues raised regarding their reliability and validity can be found in [161], who considered contingent valuation and travel cost approaches in their analysis. In a different study, the authors [162] reviewed the previous literature and empirically showed that presentation of the topic may matter in the case of contingent valuation and choice experiment. Such caution is important, as broad descriptive terms may mask the many design and methodological differences that exist in implementations of the contingent valuation and choice experiment approaches.

Valuation methods, such as the travel cost method and the choice experiment method, were also used in the case of cultural heritage [163], natural attractions [164], climate change hazards to coastal regions [165], and evaluation of services from the Ramsar-protected Cheimaditida wetland in Greece [166].

And, finally, a review of water valuation metrics for the manufacturing sector was presented in [167]. The authors defined the full value of water as price + true cost + other internal costs + indirect/opportunity costs and compared results across 20 industries and 8 countries between 2005 and 2020. The authors showed, using many international cases, that by extending the concept of water value to include various relevant cost and value components, the development and deployment of cost-effective water conservation technologies becomes more economical, thus improving the sustainability of the manufacturing sector with respect to water.

6.5. Modeling Approaches

6.5.1. Hydro-Economic Modeling

Hydro-economic models (HEMs) help address water management problems by integrating frameworks that explicitly represent the relationship between the hydrology aspects of the water body analyzed and the economic, infrastructure, legal, and institutional aspects of the region under consideration. The combination of these characteristics of management provides better-informed results for decision making in the complex environment in which water managers operate. HEMs allow for economically and hydrologically defining and describing both water supply and demands [168]. Over the years, HEMs have been developed to address several important issues, such as adaptation to climate change, environmental flows, conflicts among domestic sectors, and international water, to name a few.

Several publications have provided reviews of the body of literature on HEMs. Such publications include [169], which reviewed 80 HEMs applied to water analysis in 23 countries. The paper identified the key stages in the design and formulation of the models, the levels of integration, the spatial and temporal scales, and the solution techniques. Bekchanov et al. [170] classified HEMs into network-based (simulation or optimization) models and economy-wide (input–output or computable general equilibrium) models. The paper pointed to the primary differences in the applications and interpretations attained using these approaches. The paper recommended that additional efforts are needed to account for the range and complexity of linking water systems and society in a more realistic way, particularly regarding ecology and water quality and with focus on the food and energy sectors. A review integrating hydro-economic models aiming to capture the complexity of interactions between water and the economy can be found in [171]. The paper identified issues and suggested future research directions in integrated hydro-economic modelling, which were demonstrated using a variety of case study applications worldwide. A different angle was presented in a review [172] comparing the relevance of HEM approaches for large-scale decision-making projects in multi-sectoral and multi-regional river basins.

Daclin and Fernandes [173] proposed a modeling approach that identifies possible applications of water management instruments that are integrated with each other in order to create a water allocation strategy joined with economic development projections and changing water use preferences.

A couple of publications have demonstrated the use of HEMs in addressing transboundary river water sharing disputes [174,175] by introducing benefit-sharing arrangements to the analysis and developing a continental-level HEM [176].

Another aspect of water management addressed by HEMs is the handling of water pollution either by urban centers [177] or by the agricultural sector [178,179].

Environmental flows and impacts of water scarcity on ecosystems are a recent focus of HEMs. Several papers have demonstrated this relatively new trend. Crespo et al. [180,181] developed an HEM to assess the environmental flow value in the Ebro Basin in Spain. Levers et al. [182] developed an HEM to assess the effects of buying water for environmental use in the Salton Sea in California. And Momblanch et al. [183] developed and applied an HEM that allows for the use of ecosystem services to represent the environment.

Groundwater management is well-addressed by HEMs, showing an ability to account for the open access of groundwater and the significant negative externalities [184,185]. The interactive relationship between groundwater and a river was modeled by [186] in an HEM aimed at guiding sustainable basin management.

Sectoral integration is also one of the special features found in HEMs. The authors of [187] evaluated integration policies to allocate water between agriculture and the urban sector.

Several papers have demonstrated the use of HEMs for the assessment of possible adaptation strategies to climate change. Esteve et al. [188] assessed, with HEMs, climate change impacts and adaptation in irrigated agriculture. Expósito et al. [189] reviewed applications of HEMs to assess the effectiveness of water policies under climate change at the basin scale, and Kahil et al. [190] developed an HEM to model the impact of water scarcity and droughts on the Jucar basin and develop policy adaptations to climate change.

6.5.2. Computable General Equilibrium (CGE)

Because of the central role of water in both developing and developed economies, many intervention policies are initiated with a focus on water. Because agriculture consumes a large share (70–90%) of annual renewable fresh water in many countries, policymakers focus on improving the performance of scarce water use in irrigated agriculture. Policies target multiple objectives, including income transfer, food production security, environmental sustainability, and resource conservation. The multi-objective goals of such policies may lead at times to pervasive outcomes in various interacting sectors. This system of cause and effect also holds for the urban water sector, as well as for the industrial and environmental sectors. Therefore, water as a policy focus has to be regulated at the economy-wide level when being allocated among competing uses.

Increased globalization and climate change impacts suggest that water policy is no longer a local but rather an economy-wide matter. Recognizing this scope gave rise to economy-wide studies. While many economy-wide analyses (mainly computable general equilibrium (CGE) models) have been published on water, not much can be generalized, mainly because these studies use different assumptions and structures of the economy. For example, many CGE studies on water that have been reported in the literature treat irrigated agriculture as one sector. Such structures are only appropriate in economies with physical (soil properties, water sources, etc.), economic, and social conditions (crop mixes, proximity to markets, farm size, water delivery costs, etc.) that are alike or similar across regions. However, existing spatial variation within the economy makes such an assumption irrelevant for the simulation of real-world policy interventions [191].

Two extensive review papers on CGE and water have been published recently. They provide insight into methodological issues associated with the modeling approaches. The first paper [192] focused on the implications of using different assumptions regarding water as an implicit or explicit production factor. They further distinguished between models in which water is assumed to be an explicit factor of production and assumptions of a high level of substitution between water and other primary factors as opposed to a low degree of substitution. The paper also differentiated between regional and global models, including international trade. The review identified several gaps that need to be considered in the future, such as the inclusion of non-consumptive uses and heterogeneity among the water-using agents or regions. The second review [193] focused on how the water–energy–food nexus (WEFN) is dealt with in CGE models, discussing their design, importance, and possible means of improvement. Lately, a growing literature has focused on WEFN, and understanding the modeling structure would be critical for evaluating their results. The paper argued that most CGEs in the literature face difficulties in representing the competing water uses across sectors, especially in the energy sector. Thus, addressing the issue of precise distinction across competing water use sectors is a necessary objective in future research.

While policy interventions at the regional level could lead to desirable results, local considerations may also lead to a sub-optimal outcome from a social point of view. This point was demonstrated in recent works on economy-wide considerations and linkages in Morocco, South Africa, Turkey, and Mexico [194,195,196,197,198], respectively, which were summarized and synthesized in [191]. It was observed that reforms in sectors other than agriculture have significant impacts on rural households’ incomes, and that water reforms that are designed without taking into account reforms outside irrigated agriculture, such as the major consumer of available water, may lower the overall productivity of irrigation water and lead to a negative impact on the other sectors competing for the limited resource.

Additional interesting and useful CGE works include studies examining investments in the water sector to address possible investments in reservoirs or water transfers aimed at relieving regional water scarcity [199], and national investment in extending the water portfolio by considering wastewater treatment facilities and desalination plants [200]. Several studies have introduced the consideration of new irrigation technologies and irrigation management practices and their likely effect on the water-using sectors [201,202]. A large body of work focusing on international trade impacts on water-sector performance has included the influence of globalization impacts on national economies [203,204]. It should be mentioned that the analysis in [202,204] was at the global level rather than at regional or country levels.

Another line of studies has introduced the use of CGE models for national or sectoral planning by government agencies (Australia [205]; New Zealand [206]). And, finally, one study of many that demonstrated the usefulness of the CGE framework in analyzing economy-wide and sectoral impacts of climate change is [207], which succeeded in breaking down various economic consequences of climate change by sector and region.

And, finally, [208] provided an extensive review of challenges associated with the incorporation of water scarcity into a CGE model operating at a global scale. Challenges are due to the absence of standardized data, overlap due to intersecting river basins among countries (in the case of international water), and difficulties in modelling the demand for and the supply of water in different jurisdictions. Simplifications to the modeling have been introduced to face such challenges. The paper referred to the three most-used simplifications in the literature: (a) addressing global questions in a national-level model; (b) combining irrigated and rainfed crop production into a single sector; and (c) eliminating river basin boundaries within a country. The paper compared the impact of such simplifications on the ability to predict the impacts of future irrigation water scarcity on land use, crop production, international trade, and regional welfare, relative to the full-scale model. The findings suggest that it may be non-harmful to ignore sub-national hydrological boundaries in a global economic CGE analysis.

7. Linking All of the above into One Framework

Water suppliers and the water-using sectors face major challenges due to external (climate change, globalization) and internal (population growth, failing institutions) interruptions in water availability and quality. This review has identified several ways in which scholars in the field have handled such challenges at local, regional, and, sometimes, global levels.

One of the lessons from reading the literature calls for work that integrates the entire set of water types, including surface water, groundwater, reclaimed wastewater, and desalinated water. Some of the works cited demonstrate the conjunctive use of some of these water types, but not all of them. Having models with use, investment, and trade-off among those types of water demonstrates the usefulness of such integration, especially when the water supply sources are sensitive to climate change [6]. An important consideration is the role of technological innovations in securing/conserving water resources and regulating their quality. Many studies have investigated the feasibility (physical and economic) of water-quality-enhancing and quantity-conserving technologies. But, such studies are incomplete in that they cannot guarantee the adoption or use of such technologies such that the water sector can benefit from their performance.

A recent surge in scientific work has identified international water as a critical issue in the sustainability of water in internationally shared river basins. Given that more than two thirds of the world’s land area contain international river basins [80], sharing water in a sustainable way becomes critical in many parts of the world. As a common pool and strategic resource at the local and international levels, the use of allocation methods that account for behavioral and experimental economics and game theory to deal with strategic issues are quite important and needed.

It is quite intriguing to think about the possibility of having interactions between the results obtained by tools, such as experimental economics, game theory, valuation, and institutional innovation, and modeling frameworks that can demonstrate their use in a basin, a region, and globally. Water resources are of different natures, valued differently by different users, and considered by different users as a strategic resource to different extents. Therefore, a framework that includes various analytical approaches would contribute more than a single approach to addressing challenges faced by water users.

8. Unaddressed Issues and Agenda for Future Research

It is only natural that this review cannot address the entire spectrum of new water issues and how economic and modeling approaches may help. An attempt to cover all water issues and all possible approaches may not be achieved. The listed issues and the discussion below are a good assessment of what is still left to be addressed.

In terms of the types of water and categories of water uses, this review does not cover the area of reclaimed wastewater and desalinated water, although they were included in reviews of works that deal with multi-sectoral and intertemporal considerations. These two sources of water were almost taboo in the early 2000s, but as natural water (precipitation) becomes more unreliable and scarcer, the value of the conjunctive usage of surface water, groundwater, reclaimed wastewater, and desalinated water increases dramatically. A recent example is the diversion of the Israeli National Carrier Project from using only snowmelt water, originally stored in the Sea of Galilee and conveyed to Southern Israel, to become the destination of desalinated sea water from seawater treatment facilities along the Mediterranean. This revolutionary concept will allow the water system in Israel not only to sustain the economic activity of the state of Israel, but also to support thirsty Jordan with additional drinking and irrigation water in a long-term agreement (https://www.timesofisrael.com/israel-to-be-1st-in-world-to-pipe-desalinated-water-into-a-natural-lake-the-galilee/) (accessed on 13 February 2024).

This brings us to another aspect—the use of technology to increase regional cooperation in water-scarce regions. The situation described in the previous paragraph involving a technology to secure sustainability of water resources and increasing economics and political stability of a water-scarce region is only one example of the possible use of a technology to enhance cooperation in managing joint water resources. Another technique is cloud seeding, which can be relevant to many international river basins. This proceeded by setting rules for the allocation of the cost of cloud seeding among the riparian states, including compensation for the cost of cloud seeding if rain falls in the parts of the basin belonging to a riparian state that did not invest in the seeding.

Moving along the untouched issues brings us to a very acute policy question of dam removal. Recent work on the economics of dam removal has brought to light many controversial opinions that are seen in publications, such as [209], in which cited works identified severe flaws in the consideration of the benefits of dam removals and fish passage.

A different perspective on dams is seen in [210], where the state of knowledge about dam values and impacts was reviewed. The paper provided evidence that investment in additional surface water storage may not be always the best solution for addressing water scarcity. The author suggested that perhaps due to existing heterogeneity in the sector that affects the performance of dams, policymakers do not appear to take advantage of economic tools for decision making regarding dam operations. This calls for advancing economic analyses of dam evaluation in order to avoid costly mistakes in the process of construction and removal of such infrastructures in the future.

And, finally, many works deal with groundwater, and even a conjunctive management of groundwater and surface water. Relatively few studies exist that evaluate groundwater policies to prevent negative externalities from groundwater extraction over time. Several directions have been proposed in previous sections of this review. However, given the relatively few works involving economic considerations of GW-led land subsidence [47,211], more studies are needed regarding the economics of GW-led land subsidence. GW-led water quality crises are occurring in several parts of the world [212,213], and they need to be reflected in more economic analyses. Another important groundwater-related direction of work is the regional analysis of managed aquifer recharge (MAR) and how MAR can ease long-term regional water scarcity. Research on MAR combines all components that have been recommended in this review, including the inclusion of different types of water and allowing for regional cooperation and multisector considerations.

9. Personal Reflections

Having the opportunity to reflect upon the performance of several economic and modeling approaches and also to have exercised several of them, I would like to share my own opinion. Given the increased complexity of the water and environmental interactions, models applied to address water resource management challenges have to take into consideration the physical environment (soil–plant–human interaction). This added complication makes the development and use of simplified models less relevant. It necessitates a collaboration between economists and scientists in the development and use of more detailed physical models to support the economic objectives.

My own personal long-term experience working with game theory, experimental economics, and hydro-economic models and other analytical frameworks that aim to address challenges in water resource management suggests that the inclusion of scientists, engineers, and other non-economic experts relevant to the question being addressed results in a more relevant product that also has an impact on policy and speaks to more sub-disciplines. Indeed, the process of inter-disciplinary collaboration is more cumbersome, but the end product is of much greater relevance, and it widens the capacity and understanding of the physical processes gained by the team members.