ECONOMICS

THE SOCIAL COST OF DAM CONSTRUCTION

SUBMITTED BY: SURYADEV SINGH CHHAPOLA SUBMITTED TO

SURYAPRAKSH MISHRA

ROLL NO.: 72BALLB18

NATIONAL LAW UNIVERSITY

DELHI

2019
 INTRODUCTION

The research paper is an attempt to look at the social costs arising out of the construction of
dams. Dams are often considered to be the symbols of economic development. But like other
infrastructural projects, dams too are accompanied by certain social costs arising out of its
construction. The research paper will look at various social cost arising out of the
construction of dams and then try to internalize the social cost arising out of such
constructions. The main focus would be on the identification of externalities arising out of
such transactions. The focus will be quarantined to the construction and impact of it with
respect to India. The dams have different impacts upon people living in downstream and
upstream areas. Generally, people living in downstream areas are the beneficiaries as they
reap benefits of enhanced irrigation by adequate water supply, electricity which ultimately
helps in the productivity of this region. But, the people living in upstream areas suffer from
adverse impact of such construction as they suffer of loss of livelihood, land and ecological
changes and increased chances of flooding in those areas etc.

In this age of rapid industrialization and infrastructural development backed by the

omnipotence of science & technology, life today has become much easier. The state too looks
for certain innovation which would be instrumental in the development of the nation. With an
aim to boost country’s growth the state with the help of its machinery and required capital
proceeds with infrastructural and industrial development of the nation. But, all these
industrial and infrastructural development comes at a social cost. Most of the times the social
cost arising out of such projects either go unnoticed or is wantonly disregarded by the
government. The social cost is cost that is born by the society in case of any developmental
project commences. The social cost may by in the form of pollution arising out of industries,
dislocation of indigenous people due to setting up of industries etc. Sometimes direct social
costs are clearly visible to us whereas sometimes the natives have to bear the brunt of the
indirect social costs too.

One such infrastructural project to provide a fillip to country’s growth is the construction of
Dams. Dams emerged as the sigil of modernity in the 20 th century across the world and
particularly in our country dams started to be considered as the ‘temples of modern India’.
Dams became synonymous with progress and economic development. With the onset of
modernity, energy requirement peaked across the world.1 The exponential growth in the
population, urbanization and enhanced economic growth made energy scarce and thus there
arose a greater need for the production of energy. Energy is almost required in every facet of
life and without the sources of energy life on this heavenly earth can’t be imagined. Since,
energy requirement peaked dams became a viable option for the generation of hydro-
electricity i.e generation of electricity by utilizing the potential energy of the river or the
streams. Dams generate hydroelectricity and are cleanest form of renewable energy which
means that there are no by-products unlike industries where a large amount of pollution is
emitted. Once these hydropower plants are built, they require low operational maintenance
and have larger life span. In this age of high carbon emissions, hydropower and wind power
can be seen as alternative sources of energy production. Apart from just hydroelectricity,
dams too have certain other advantages such as it is highly beneficial for irrigational
purposes, it contributes in regional development, provides jobs, helps in flood control etc.

Now, not everything is good with the construction of dams. While construction of dams the
governments have deliberately avoided social costs associated with it. The International
Rivers Network has reported that there has been destruction of species and ecosystems as
almost 60% of the major rivers are dammed. Further, there has been a huge detriment to the
forest cover and forest life. Apart from these the social cost subsume dispossession. The
indigenous people are dispossessed of their agricultural land, their grazing field, fishing zones
and other resources upon which they depended upon their livelihood. The next social cost
comes in the form of cultural alienation. History is testimony to the fact that the world’s
biggest civilizations have flourished on the banks of rivers. Thus, dislocation will lead to the
erosion of their culture and their cultural identity. Their precious traditional knowledge,
rituals will all be decimated in the blink of an eye. An individual gets attached to his ancestral
land and property and thereby it becomes difficult for him to part with it. The next social cost
has some bearing upon the health of an individual. In a report published by the World Health
Organization (WHO), it stressed that the reservoirs constructed behind dams often give way
to water-borne illness such as malaria, schistosomiasis, cholera etc. 2 The same has been

1
Nirmalya Choudhary “Sustainable dam development in India: between global norms and practices” (2010)

2
Sophie Namy, “Addressing the Social Impacts of Large Hydropower Dams” (2007)
corroborated by a study in Sri Lanka where they found that dissemination of malaria is
closely linked with the hydrological changes due to irrigation and hydroelectric projects on
Mahaweli river which if further worsened by the increased migration due to resettlement
process. One of the social cost also pertains to high level of mercury being found in fishes
near dams which makes it extremely unfit for the downstream people to consume. Finally, the
most important and decisive social cost is the stress and mental agony that they have to tackle
due to relocation and disruption of their social network and ambience which they had before
resettlement. Compulsory and forceful resettlement makes their life more stressful as they are
uprooted from their homes and their livelihoods are deeply impacted. Thus, these are the
indirect social costs which arise due to construction of dams.3

Now, though there is an existence of social cost but the construction of dams keep on taking
place as the larger public welfare always outweighs the social costs. Thus, dams are
considered to be public good as it aims for the general welfare of the public and strives for
greater public good.

As the objective of the research paper is to internalizing and addressing the social cost, the
researcher will be dealing with the theories proposed by R.H. Coase and VFD Pareto.
Professor Coase in his article titled ‘The Problem of Social Cost’ has asserted that a problem
is of reciprocal nature and a harm must be avoided which is grave or serious in nature. The
second theory formulated by Pareto which is also known as ‘Pareto Optimality’ states that
“we can make someone better off on condition that another is not worse off”. This means that
a new arrangement or policy must be as such which does not further decline one’s economic
position.

3
Sophie Namy, “Addressing the Social Impacts of Large Hydropower Dams” (2007)
 INTERNALIZATION OF SOCIAL COST

This chapter in particular will be dealing with various issues arising out of social cost. We
have already as to what kind of social cost arise out of construction of dams. So, the need of
the hour is to properly address those social cost by way of internalization. The local
inhabitants have to suffer a lot due to such transactions taking place. To address these social
cost in toto we need applications of Coase Theorem. To get perfect results using Coase
Theorem, we need to find externalities arising out of dam construction. The externalities can
be both positive and negative in nature. For people living in downstream areas, they will be
abundantly benefitted. They will be getting abundant electricity supply, good irrigation
facilities and thus will have good productivity in their region. Hence, the externality arising
out in such a scenario will be positive in nature. But, these people are also going to face
negative externality as they can face huge water scarcity during summer. So, no matter what
discourse we choose it is largely the negative externality dominating the positive one. We
have already discussed various social cost arising out of a dam construction. It subsumes loss
in livelihood and socio-cultural values. The ones who after re-settlement policy settle in other
communities are often perceived as outsiders and thereby are subjected to discrimination.
Thus, the coherency which existed earlier is disrupted and there is a huge loss in the form of
community life. It can be observed that the condition gets worse and poverty increases due to
inadequate re-settlement policy.4

Thus, the negative externalities arising out of such construction of dams have to be
adequately addressed in order to minimize the social costs. The argument always advanced
against these social costs is that the public welfare overrides the social cost. But, when we
can have policies where we can have both public welfare as well as minimization in social
cost, I think we should be adopting those policies efficiently.5

4
Dam Displacement and law in India < http://planningcommission.nic.in/reports/articles/ncsxna/art_dam.pdf >

5
Duflo and Rohini Pande, “Dams” (Economic Growth Centre, Yale University, (2005)
A dam while construction requires a lot of land. Now, it’s a daunting task for a government to
find such an area as the government can easily ask the local inhabitants to vacate their land in
lieu of compensation. Apart from compensation, the government too provides adequate re-
settlement policy so that the inhabitants do not have to wander here and there. The
landholder’s exercise of their property rights is encroached by the government in the due
exercise of its sovereign functions. So, we find here that there is rearrangement of rights over
use of property for the larger public welfare. Apart from compensation and re-settlement
policies, the government too strives to provide livelihood opportunities to the general public.
It can also be assumed that the construction of dams is going to increase overall production
and the compensation or re-settlement policies are adequate enough to address the
predicament of the local population so displaced. 6The people so satisfied with these policies
are able to save their litigative cost. Had they not been satisfied, they would have wasted their
valuable time fighting against the government in the courts in demand of higher
compensation. It can also be argued that the people so displaced are also going to reap the
benefits of such dam construction in the long run. Now, another situation may have arisen in
the form that the inhabitants do not have any right over the property and hence in such cases
the government would not have to compensate anyone. So, it can be held, since the overall
production has increased due to such construction, the social cost arising thereby have to be
shared both by the government as well as the local inhabitants.

Now, if we use the application of Coase Theorem, we will have to make free riders
accountable in order to internalize the social cost. These dams often become a site for
recreation, fishing and hence, we can charge these people if they are reaping the benefits of
dam construction by way of recreation, fishing or any other things. The ones who are socially
affected must be compensated by the acts of free-riders.7 Also, the local inhabitants who are
affected must be given exclusive rights over the use of such dams for their economic
development. The government must levy a small account of tax on the acts of free riders for

6
Duflo and Rohini Pande, “Dams” (Economic Growth Centre, Yale University, (2005)

7
Julian Kirchherr and Katrina J Charles, “The social impacts of dams: A new framework for scholarly analysis”
(Environmental Impact Assessment Review, 2016)
<http://www.sciencedirect.com/science/article/pii/S019592551530033>
the economic prosperity of the affected people. Thus, this will be instrumental in eradicating
out the burden from the government.

Thus, applying the Coase Theorem which advocates for the sharing of social cost by
enhancing the overall economic production the government as well as the local inhabitants
can subsequently share the burden of social cost. As both the government as well as the local
inhabitants are beneficiaries of the increase in overall economic production, social costs gets
minimized to a certain level.

PARETO EFFICIENCY AND DAM CONSTRUCTION

So, far we have asserted the fact that the construction of dams contribute to an overall
increase in the production and is beneficial for the masses. We have already dealt in the
previous chapter as to how we can internalize the social costs arising out of such construction
of dams using the famous Coase Theorem. Despite of an overall increase in production and
rearrangement of rights, the gains accrued out of such transactions is just marginally more
than the losses of harms arising out of the social costs. Various studies have also found that
there has been an aggregate increase in the poverty due to unequal and unfair distribution of
resources as the ones who have accrued benefits out of such transaction haven’t actually
contributed to the economic development of the affected people. Thus, due to an active
increase in the act of free riding, the ones who were affected continue to be in an abysmal
state. The underlying faulty mechanism and improper redressal of the matter have made the
living condition of these inhabitants much worse. The re-settlement and rehabilitation
policies of the government hasn’t been able to adequately address the grievances of these
indigenous people.8

As we have discussed earlier, the clear-cut profit earners of a dam construction are the people
living in downstream areas. However, the losses are unparalleled in the case of people living
in upstream areas. Dams bring with it certain benefits such as it increases the water table and
thus increases the productivity of such region but still the social costs associated with it
remains unaccounted. Further, the dams too have urban application where the water supply is
carried out to cities and urban areas. But, it can have the high risk of creating water shortage
in the downstream areas who so far have reaped the benefits of increased water supply. Thus,
irrigation or hydroelectricity is not only the sole aim behind construction of dams. However,
India is yet to suffer any environmental social cost due to large dam construction.9

8
Nirmalya Choudhary “Sustainable dam development in India: between global norms and practices” (2010)

9
Julian Kirchherr and Katrina J Charles, “The social impacts of dams: A new framework for scholarly analysis”
(Environmental Impact Assessment Review, 2016)
<http://www.sciencedirect.com/science/article/pii/S0195925515300330 >
Another problem which frequently occur is the problem of water-logging and floods which
may occur due to overflow of the embankments during high monsoon seasons. There can be
immense ecological impact due to cutting down of forests in the form of soil erosion or
landslides during construction of dams and resettlement of displaced population. The
agricultural productivity is also negatively impacted due to the presence of saline water and
loss of land fit for cultivation. Further, the people in upstream areas face economic divide as
only the rich and large landholders get to use the water resources. The chances of water-borne
diseases also increase due to storage of water for lengthy periods.10

An important issue also arises in the form of resettlement and rehabilitation of people who
are affected by such constructions. The situation is however same for the people who are with
or without land. While, the landholders get land in return but the landless and the tribals who
thrived on such natural resources are deprived by it. The compensatory money and the land
given to the landholders is of no use and the money is already used before any substantive
gains can be made out of that. The land given is largely infertile in nature and thus the
productivity does not remain the same as it used to be before. So, this policy of giving money
and land needs serious contemplation on part of the government.

A report by the World Commission on Dams (WCD) has stated that the agricultural
productivity due to construction of dams have just seen a marginal increase. Extensive
rainfall in upstream areas have contributed to rife poverty and disruption in ecological system
in a substantive manner. Hence, it can be opined that the dams have not been able to achieve
its required objective of bringing economic prosperity to poor and displaced people.11

Now, taking into consideration the ‘theory of Pareto efficiency’, the construction of dams is
going to be cost effective only if it increases the overall economic productivity without
impacting anyone negatively. Hence, an important question which we need to ask ourselves
is whether the construction of dams is actually helpful in alleviating poverty. So, we have

10
Sophie Namy, “Addressing the Social Impacts of Large Hydropower Dams” (2007)

11
Nirmalya Choudhary “Sustainable dam development in India: between global norms and practices” (2010)
already established from the research that though the dam constructions help people living in
downstream areas but the same is not the case with other sections of the people who have
severely affected due to such policies. The economic situation of a huge chunk of people
hasn’t stabilized and thus reducing the efficacy of such constructions aimed at benefitting
them. Thus, the ‘Pareto efficiency or optimality is not being achieved by the existing
government policies at present and thus there is a greater need for deliberations upon such
policies. The improperly implemented rehabilitation schemes has led to wastage of human
resources which could have been utilized in a proper manner. 12

In order to achieve ‘Pareto Optimality’ it is imperative that the profits or the surplus achieved
by the people due to such construction be distributed among the affected people. The amount
that is to be distributed must be the benefit that will be accrued throughout the life span of a
dam minus the social costs and the cost of construction of Dam. The remaining money should
be used for bettering the lives of such affected people and enhancing their economic
productivity. Thus, we can reduce the social cost to some extent and work for the economic
prosperity of the affected individuals at the same time.13

Thus, Pareto Optimality can be mathematically described as:

Pareto Optimality = {Benefit accrued throughout the lifespan of a Dam-( Cost of construction
of Dam + Social Cost)}

12
Duflo and Rohini Pande, “Dams” (Economic Growth Centre, Yale University, (2005)

13
Julian Kirchherr and Katrina J Charles, “The social impacts of dams: A new framework for scholarly analysis”
(Environmental Impact Assessment Review, 2016)
<http://www.sciencedirect.com/science/article/pii/S0195925515300330 >
 CONCLUSION

From times immemorial, we have witnessed industrial and infrastructural development

accompanied by some sort of social cost. Despite of the presence of various social costs,
these activities continue to grow as the larger public welfare always overrides the existence of
such social costs. In the same way construction of dams continue to take place despite of
several social costs associated with it. These social costs include loss in livelihood,
dispossession, cultural alienation, health issues, discrimination faced in the resettled society,
and many more. The dams are very useful in gaining energy using the potential energy of the
flowing rivers. Dams are used for the production of hydroelectricity which is the cleanest
form of renewable energy with low operational cost associated with. Dam are highly useful
for storage of water, irrigational facilities etc.

But the important thing is as to how do we tackle the social costs associated with construction
of dams. Using Coase Theorem and Pareto’s Optimal theory it has been suggested that the
benefits accrued from such construction must be distributed for their well-being and
economic prosperity. Further, there is strong urge to deliberate upon the existing
governmental policies as they fail to adequately address the needs of the affected people.

Thus, every effort must be made by the governments to ensure that social cost gets reduced to
a certain level. They must contemplate upon their policies and rectify it so that the affected
people do not face any problems in future. Dams are an important indicator of country’s
development and every effort must be made to reduce the social costs associated with it.