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III. Water Values

The economic value of water depends on the time, location, and type of use. For

agriculture and industry, water is an economic factor of production to be used with other factors

such as labor and capital to produce income. The value of water is measured by what it

contributes to income. For domestic use or recreation water is more of a final good, a

commodity. In the following sections, we outline the value of water in these uses.

Value in Urban Use

Water is essential for life, but the reality is that people in the U.S. use a lot more water

than is absolutely necessary to sustain life. The use of water has tremendous convenience value

in a modern household. Besides cooking, washing and cleaning, the American household uses

water to maintain an attractive domestic environment in landscapes and lawns. All these uses of

water are non-essential from a survival perspective but are greatly desired. Economists thus

analyze water as an economic commodity for which there is a large urban demand. The

willingness of people to pay for and then use water in every day activities is what gives water an

urban economic value.

Economic value is derived from the concept of demand – the amount of water that people

use at alternative prices. The flip side of demand is the dollar amount people are willing to pay

for additional water given that they are already using a certain quantity. Economists label this

concept willingness to pay or WTP and we use it as the measure of long term annual value of

water. It is a long standing economic principle that if one can derive a relationship between the

amount of water people might use at different water prices (a demand curve), then the “inverse”

demand function is a measure of WTP and economic value.3

3

We employ the concept of consumer surplus to measure change in economic values.

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