Professor Michael Hanemann urged economists to be empirical rather than theoretical when teaching and researching the economics of water when he made his keynote presentation at EfD’s Annual Meeting. The title of the presentation was The economics of water – too important to be left to economists?
Hanemann asserted that economics is still dominated by theory and not empirical analysis and urged economists to take into consideration that water management differs between countries and even between parts of the country.
“Economists develop theories that simplify and oversimplify with severe implications,” he said.
“When economists study water issues, they should do it in a more nuanced economic analysis and avoid misconceptions and oversimplifications.”
Water has been meddled in human history, within laws and institutions, which explains the complexity and the need to understand the context in which the problem is being analyzed.
Issues surrounding water supply, demand, and governance
Michael Hanemann stressed that water supply is very capital intensive and the infrastructure has to be financed before you can start using it. The question is who should pay, as it will also benefit coming generations.
Another issue is the fixed cost of water. If you supply less water, those costs do not change, since you have to maintain the infrastructure just the same.
On the demand side, Michael Hanemann said, economics believe in using the price to get people to use less water when there is a shortage.
“The economists' notion that you can steer the level of water consumption just by changing price politically is insufficient. We need to understand how people make decisions around water in a more realistic way,” he explained.
Key messages to economists
Michael Hanemann’s advice to economists is to interview people, and not just start with theoretical ideas.
“For environmental economists, it is even more important. We’re dealing with people and their wellbeing and we have to be very serious about understanding their situation and doing realistic analysis.”
Details of the presentation on this topic are herewith attached.