The economics of dams

Dams provide a host of benefits to societies, helping to balance variability in water availability with demand for multiple uses, allowing power generation, providing and enhancing recreation opportunities, and offering protection against damaging floods. Yet dams are often controversial due to their high investment requirements, unequal distributional effects, and concerns over the irreparable harm they may cause to free-flowing rivers and ecosystems. This paper considers the economic case for such projects, organized around a review of what we know about their value and impacts. Though heterogeneity across contexts is a common feature of interventions in many sectors, we argue that it is particularly acute in the case of dams, and that this creates difficulties for drawing general conclusions about their social value. Still, evidence suggests that investment in additional surface water storage may not always be the best solution for addressing water scarcity. Furthermore, a number of biases and blind spots exist in economic frameworks used to evaluate dams, and these often challenge analysts’ ability to correctly identify which projects will be most attractive. Perhaps due to some of these perceived deficiencies, policy-makers do not appear to make much use of economic analyses for decision-making about dams. If progress is to be made in avoiding costly mistakes related to construction and removal of such infrastructures in the future, economists need to improve the realism and methods underlying their analyses of the value of dams, and offer more useful interpretations of the results that these approaches produce.