s u m m a r yGrowing water extractions combined with emerging demands for environment protection increase competition for scarce water resources worldwide, especially in arid and semiarid regions. In those regions, climate change is projected to exacerbate water scarcity and increase the recurrence and intensity of droughts. These circumstances call for methodologies that can support the design of sustainable water management. This paper presents a hydro-economic model that links a reduced form hydrological component, with economic and environmental components. The model is applied to an arid and semiarid basin in Southeastern Spain to analyze the effects of droughts and to assess alternative adaptation policies. Results indicate that drought events have large impacts on social welfare, with the main adjustments sustained by irrigation and the environment. The water market policy seems to be a suitable option to overcome the negative economic effects of droughts, although the environmental effects may weaken its advantages for society. The environmental water market policy, where water is acquired for the environment, is an appealing policy to reap the private benefits of markets while protecting ecosystems. The current water management approach in Spain, based on stakeholders' cooperation, achieves almost the same economic outcomes and better environmental outcomes compared to a pure water market. These findings call for a reconsideration of the current management in arid and semiarid basins around the world. The paper illustrates the potential of hydro-economic modeling for integrating the multiple dimensions of water resources, becoming a valuable tool in the advancement of sustainable water management policies.
Gisser and Sánchez (1980a) state the conditions under which welfare gains from policy intervention are negligible in aquifer management, when compared with non-regulation or “free market” outcomes. This is the so-called Gisser–Sánchez effect (GSE), which has been supported by the ensuing literature during recent decades. The GSE requires a number of assumptions, among which is the disregard for aquatic ecosystems linked and dependent on aquifer systems. The depletion of aquifer systems in arid and semiarid regions worldwide is causing acute water scarcity and quality degradation, and leading to extensive ecosystem damages. This study shows that by including environmental damages into the analytical model, results can change substantially. The analysis highlights both theoretically and empirically the importance of policies in groundwater management, as well as the potential role for stakeholders' cooperation. The empirical application deals with two large aquifers in Spain, the Western La Mancha aquifer which is grossly mismanaged, and the Eastern La Mancha aquifer, which is moving towards sustainable management. Western and Eastern La Mancha aquifers illustrate that policies and institutions are essential to avoid the current global aquifer mismanagement
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