The citation for the prize follows:

Partha Dasgupta and Karl-Göran Mäler are two of the world's leading economists in the fields of environment and resources. They began their careers in the 1960s when environment was emerging as a global concern and, working both separately and together, they have made seminal contributions to the field.

This special issue collects research initially reported at two very different fora. The first was the ‘International Symposium on Water Resource Management—Efficiency, Equity and Policy’. This conference was held in Cyprus, and was jointly organized by the University of Cyprus and University College London. It brought together many of the world's leading water resource economists.The editors acknowledge the sponsors of the conference: the Ministry of Agriculture, Natural Resources and the Environment of the Government of Cyprus; the European Commission, DGXII; Joannou & Paraskevaides Ltd; Caramontanis Desalination Plants Ltd; and George P. Zachariades Ltd. The research reported at the conference was made possible by a research grant from the European Commission DGXII on ‘Integrated Water Management in Cyprus: Economic and Institutional Foundations’. Individual members of the Commission, especially Dr Panayiotis Balabanis and Dr Irene Gabriel, provided helpful advice and support. The results of this project are forthcoming in a European Commission publication under the title ‘The Watershed Economics Management Approach: An Application to Cyprus’. The second was the 6th Conference of the International Water and Resource Economics Consortium, held in Waikola, Hawaii. The consortium is a group of some 60 economists from the US, Europe, and elsewhere.

Many opportunities exist to take advantage of integrated surface water–groundwater management with consequent resource and investment savings. In inappropriate legal and administrative settings, groundwater becomes an open-access resource leading to excessive contemporary and inter-temporal externalities. Several policy instruments have been used to correct these externalities: limits in well spacing and capacities, pumping taxes and tradable pumping permits. Urban–agricultural competition for limited groundwater need not result in crises for either sector if these instruments are used to mediate the competition. In the case of non-renewable stocks of groundwater, rates of economic and demographic development should be planned in keeping with long-term criteria to avoid overly rapid exploitation of the resource, non-sustainable population levels and inappropriate investment in infrastructure. Island states and coastal areas have special problems related to saltwater intrusion and coastal subsidence that can be mitigated if not eliminated through the use of economic and physical measures. Five brief case studies illustrate these points.

This paper deals with the problems of estimating irrigation water demand. We propose an original method of estimation in two steps. First, we develop a dynamic programming model in order to explain the optimal irrigation management plan. Based on a microeconomic approach describing the farmer's behavior, this economic model, introducing an agronomic model, and an algorithm of solution search, is used to compute a realistic database. Second, these data are used to estimate profit functions by a non-parametric method. The irrigation water demand function is estimated using a non-parametric derivation procedure.

An application to irrigation water demand is proposed in the southwestern area of France where conflicts appear frequently. The same results appear for different climates: for small quantities of water available, irrigation water demand seems to be quite inelastic. If one increases the total quantity of water available, the shape of the curve changes and the demand appears more elastic. The threshold price at which the changes in price-responsiveness appears, depends on weather conditions and range from 0.30 F/m3 in a wet year to 1.60 F/m3 in a dry year. These results are crucial information for the regulator in order to analyze the effects of a water regulation policy, based on prices. The impact of an increase in the water price will depend not only on the climate but also on the location of the initial and final prices on the demand function.

JEL classification: C14, C16, Q15

This paper considers a model of household demand for water in a theoretical framework consistent with fundamental principles of consumer behaviour. It applies this model to individual household data to estimate the price and income elasticities of residential demand for water in Cyprus and evaluate the welfare effects associated with changes in the water pricing system. We find that the current regionally heterogeneous, increasing block-pricing system introduces gross price distortions that are not justified on efficiency grounds. A shift towards uniform marginal cost pricing will eliminate the deadweight loss of the current system. However, its benefits will be distributed in favour of the better-off households.

Privatization of public water utilities is increasingly being viewed as a strategic solution to the observed inefficiency of the water sector in developing countries. However the link between private ownership and efficiency is unclear in the water sector, given the monopolistic nature of the service and the need for public regulation. This study poses the question whether public sector reforms could improve the operational efficiency of water utilities as an alternative to privatization.

Using Data Envelopment Analysis we find that neither the decentralization of the responsibility for water operations to the municipal level nor the establishment of an autonomous regulator had a positive impact on the efficiency of Mexican water utilities. We conclude that the enacted reforms should have been combined with reforms that introduce competition and reduce the informational asymmetries in the urban water sector.

Mitigating the harmful effects of development projects and industries (negative environmentalism) is inadequate, especially in resource-dependent economies whose resources are at risk from other forces. While positive environmentalism includes conservation projects, the non-market benefits of such projects are difficult to evaluate. This paper provides and illustrates a method for evaluating the indirect, watershed benefits of a tropical forest, without resorting to survey methods. The conservation of trees prevents a reapportionment from groundwater recharge to runoff that would otherwise occur. The value of the water saved is then valued at the shadow prices obtained from an optimizing model. An illustration of the model shows that watershed conservation projects may have very high payoffs, even before assessing existence values and other forest amenities.

The analysis demonstrates the importance of multilateral cooperation for water managers to tackle wastewater pollution along an international border. A differential game is applied empirically with data of abatement costs, environmental damages, trade flows and pollution dynamics. The framework offers a way to compare pollution control when the US and Mexico coordinate efforts and when they act independently. Results show that trade liberalization and cooperation are useful for dealing with transboundary pollution in a shared waterway. In order to investigate further the nature of cooperation along the entire border, an econometric estimation is performed that investigates the factors influencing Mexico and the US to initiate environmental improvement projects. Results show that cooperation depends on whether the project addresses transboundary wastewater pollution. Other types of pollution are not significant, nor are attributes such as how much a project costs. A project's ability to generate revenues to sustain itself significantly disadvantages the project for cooperative approval.

Water scarcity is a constraint on economic activity in many regions, and improving the allocation of water is an important part of the process of economic development. Economists have advocated water markets as a way to increase efficiency and to cope with environmental problems. Unfortunately, actual water markets, including those in developed countries, usually fall far short of this ideal. The paper considers the allocation of water by markets that are only imperfectly developed, in which prices are not publicly known and in which there is no centralized trading location. These limitations impose transaction costs on buyers and sellers, that is costs associated with completing a transaction. A conceptual model of the effect of transaction costs on trading patterns is developed. Stylized results are tested using data from an informal water market in California. The paper concludes with a description of the importance of transaction costs, comments on the transition to more formal water markets, and policy recommendations.

This paper presents the public provision of information as a policy tool both for managing water use and for encouraging the development of the agricultural sector. It demonstrates that there is a theory-based justification for the use of public weather information systems as an environmental policy tool if the following two conditions hold: 1. Agricultural production systems are information intensive, and 2. information has public good components. It is found that public provision of weather information can reduce wasted water and increase agricultural output and economic viability, providing a tool that simultaneously addresses concerns about development and the environment. Lessons learned from the impact of a weather information system in California are reinterpreted for a similar system in the developing country context of Mexico.

Water market reforms are being promoted by international organisations, such as the World Bank, and pursued within many developing countries. Actual experiences with water markets are limited and the opinions regarding the beneficial or detrimental impacts diverse. It is therefore crucial to learn from the few functioning markets. Some of the longest operating, and most mature markets in the world, are to be found in Southeastern Australia. This paper examines the outcome of water trade in Southeastern Australia and combined with US and Chilean experiences outlines some lessons for the introduction of markets in developing countries.