Economic Valuation Methods and Policy Tools for Water Resource Protection: Evidence and Implications for Water Management

Abstract

Water resource management is a core economic issue, combining public goods characteristics with significant externalities. In California, prolonged droughts and climate change have intensified competition among agricultural, urban, and ecological water uses, making the economic evaluation of water protection policies increasingly important. This paper employs a narrative literature review of environmental economics research published between 2010 and 2024, focusing on valuation methods, policy assessment tools, and their implications for decision-making. Existing studies primarily rely on revealed preference approaches (e.g., hedonic pricing), stated preference methods (e.g., contingent valuation), and meta-analyses to estimate the economic benefits of water quality improvement and resource protection, while policy case studies are commonly used to evaluate the cost-effectiveness of management strategies. The review identifies broad consensus that improvements in water quality generate substantial economic benefits, some of which are capitalized into property values. However, valuation results vary significantly across regions and water body types, limiting the reliability of benefit transfer. Moreover, non-market values remain systematically underrepresented in applied policy assessments. Policy-oriented studies suggest that upstream water protection and water reuse strategies generally offer higher long-term cost-effectiveness than post-pollution control measures. These findings highlight the need for multi-criteria evaluation frameworks that integrate both market and non-market values. To bridge these gaps, future research should prioritize dynamic evaluation frameworks that integrate groundwater shadow pricing and stochastic climate modeling, thereby ensuring robust water management decisions under increasing environmental uncertainty.