Applications of hydro-economic modelling span a wide range of water issues and geographical locations, as well as innovations. One of the advantages of hydro-economic modelling is its ability to explicitly address the issue of externality, environmental flow and equity in the model. The value of externalities and the environmental value can be estimated using both market based and survey techniques. Alternatively, an environmental flow can be set as a constraint. Likewise, institutional and political criteria can be included as constraints in the model. Further, equity issues can be assessed in different ways, such as the distribution of benefits and costs across groups of water users, comparison between inter-temporal and spatial equity, the effects of differential pricing to water-user groups and inter-generational equity.

The basic characteristics of hydro-economic-models are:

• Integration of hydrologic, agronomic and economic relationship in an endogenous system that allows for adaptation to changes in environmental, ecological and socioeconomic states
• Hydrological model codes that represent mass balance of surface water and/or groundwater stocks and flows across time and spatial scale, including water management infrastructures that affect those stocks and flows
• Economic model codes that represent measures of water demand or benefits (producer and consumer surpluses), arising from off-stream use (agriculture, industry, domestic) as well as instream use (hydropower, recreation, waste dilution, environmental purposes) from all sectors
• Specification of a river basin network that includes a water supply system (surface and groundwater), delivery system (canal network), water-user system (agricultural and non-agricultural), drainage collection system, waste water disposal and treatment system, and connections between these sub-systems
• Costs, which include: 1) operating costs related to pumping, water abstraction, treatment, artificial recharge, water delivery; and 2) externality costs
• Institutional rules and constraints related to water allocation, such as legal regulations, social or informal rules, market-based instruments and property rights
• Incorporation of economic incentives to address inefficiency and externality problems
• Spatial models that serve as platforms to integrate hydrological and economic models.

There is a number of challenges in building hydro-economic models that can adequately integrate the hydrological and economic components. For example, the boundaries of the economic sub-systems (political and administrative) might be different from those of the hydrological sub-systems. This will have implications for data collection and management as well as in aligning socioeconomic impacts with hydrological or biophysical spatial units. There may also be differences in time steps and the planning horizon between hydrological processes and economic ones. Economic models most often involve larger time steps and longer planning horizons, while hydrological models require small time steps to reflect real-world processes with the horizon for analysis determined by data availability and computational capacity.

(GWP 2013b)

To get further information about the realization of hydro-economic modelling in IWRM click on the examples below.