11.1. Introduction

Until the latter part of the 20^th Century, nature as a factor of production was considered of less significance in many economy books. Water was not in the area of interest of economists. Throughout history, Adam Smith, David Ricardo and Malthus, along with other classical economics, have recognized land as a production factor (meaning all natural resources). However, it is possible to say that the argument between limited resources and development began with Thomas Malthus (1766-1834). The Law of Diminishing Returns theory was strongly advocated by Malthus. According to the theory, as more capital and labor inputs were applied to a fixed amount of land, the marginal product of capital and labor combined eventually would decrease and so would output per capita. As different from other classical economists, Malthus concentrated on the short term instead of the long term and land was the constant. The Neo-classical economists mainly concentrated on labor and capital. In fact, in the past, indirectly renewable natural resources was easily included in the production process and assumed to be inexhaustible and infinite in accordance with the current demand. For example according to Marx, natural resources can be used as free goods. He supposed that after removing private ownership, the future society can produce the products of nature with only the real production costs, i.e. (Krautkraemer 2005). However, the conditions of today have changed considerably. The population has grown nearly 7.5 fold since the industrial revolution. The world’s population is growing by roughly 80 million people each year. The urban population of the world is forecast to grow to 6.3 billion people in 2050 from 3.4 billion in 2009, representing both population growth and net migration from countryside to city (WWDR, 2015). With such issues as global climate change and atmospheric pollution, natural resource depletion, industrialization, the environment has become one of the scarcest factors. Economics, as the science investigating how scarce resources can meet the unlimited needs of man, is not indifferent to these developments; leading to the emergence of the new field of environmental economics. As one of the fields under the umbrella of the science of economy, environmental economy investigates the problems of the environment in relation to the economy and the contribution of conservation of environment and natural resources on the economy, and it encompasses many sub-fields such as Economics of Energy, Economics of Water Pollution, Economics of Water, Water Resources and Economics. Today, one of the most problematic areas of natural resources has become water. In general, water is used in agricultural irrigation, meeting industrial needs and for domestic purposes. Changes in lifestyles and eating habits in recent years are requiring more water consumption per capita. As mentioned above, rapid population growth, urbanization, industrialization, global climate change and atmospheric pollution, or leakages from the distribution system, remain factors which limit the demand of safe water. Moreover, many underground water reserves are already running low, while rainfall patterns are predicted to become more erratic with climate change. By 2050, global water demand is projected to increase by 55%, mainly due to growing demands from manufacturing, thermal electricity generation, and domestic use. According to the United Nations World Water Development Report 2015 “unless the balance between demand and finite supplies is restored, the world will face an increasingly severe global water deficit” (WWDR 2015).