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Understanding the evolution and performance of water markets and allocation policy: A transaction costs analysis framework

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Author Info

  • Garrick, Dustin
  • Whitten, Stuart M.
  • Coggan, Anthea

Abstract

Water markets and associated allocation policy reforms have struggled to achieve their intended goals in many water-stressed rivers, in part due to the institutional friction imposed by transition and transaction costs. This paper elaborates a transaction costs analysis framework to examine the evolution and performance of water markets and allocation policy reforms. This analysis rests on three pillars: i) a synthesis of three theoretical traditions of institutional analysis (Williamson, North, and Ostrom) often considered independently; ii) a framework to examine the types and interactions of transaction costs in market-based water allocation over time; and iii) an illustrative analysis of three large river basins – the Colorado, Columbia and Murray–Darling – with varying levels of success in market-based water policy reforms. The resulting framework accounts for water's complexity as an economic good. This framework and the case studies lead to the identification of several policy implications including the need for: a multiphase sequencing of reform, strategic investment in institutional transition costs, and institutional choices that preserve future flexibility to adjust water rights and diversion limits to manage social and environmental externalities.

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Bibliographic Info

Article provided by Elsevier in its journal Ecological Economics.

Volume (Year): 88 (2013)
Issue (Month): C ()
Pages: 195-205

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Handle: RePEc:eee:ecolec:v:88:y:2013:i:c:p:195-205

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Web page: http://www.elsevier.com/locate/ecolecon

Related research

Keywords: Transaction costs; Water allocation; Water markets; Water rights; Colorado river; Columbia river; Murray–Darling river;

References

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  1. Douglass C. North, 2005. "Introduction to Understanding the Process of Economic Change
    [Understanding the Process of Economic Change]
    ," Introductory Chapters, Princeton University Press.
  2. Howitt, Richard E., 1994. "Empirical analysis of water market institutions: The 1991 California water market," Resource and Energy Economics, Elsevier, vol. 16(4), pages 357-371, November.
  3. North, Douglass C, 1994. "Economic Performance through Time," American Economic Review, American Economic Association, vol. 84(3), pages 359-68, June.
  4. Jaffe, Adam B. & Newell, Richard G. & Stavins, Robert N., 2003. "Chapter 11 Technological change and the environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 11, pages 461-516 Elsevier.
  5. Gary D. Libecap, 2011. "Institutional Path Dependence in Climate Adaptation: Coman's "Some Unsettled Problems of Irrigation"," American Economic Review, American Economic Association, vol. 101(1), pages 64-80, February.
  6. Saleth, R. Maria & Dinar, Ariel, 1999. "Water challenge and institutional response (a cross-country perspective)," Policy Research Working Paper Series 2045, The World Bank.
  7. Crase, Lin & O'Keefe, Sue & Dollery, Brian, 2013. "Talk is cheap, or is it? The cost of consulting about uncertain reallocation of water in the Murray–Darling Basin, Australia," Ecological Economics, Elsevier, vol. 88(C), pages 206-213.
  8. Coggan, Anthea & Buitelaar, Edwin & Whitten, Stuart & Bennett, Jeff, 2013. "Factors that influence transaction costs in development offsets: Who bears what and why?," Ecological Economics, Elsevier, vol. 88(C), pages 222-231.
  9. Gary D. Libecap, 2009. "Chinatown Revisited: Owens Valley and Los Angeles--Bargaining Costs and Fairness Perceptions of the First Major Water Rights Exchange," Journal of Law, Economics and Organization, Oxford University Press, vol. 25(2), pages 311-338, October.
  10. M. D. Young & J. C. McColl, 2003. "Robust Reform: The Case for a New Water Entitlement System for Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 36(2), pages 225-234.
  11. Marshall, Graham R., 2013. "Transaction costs, collective action and adaptation in managing complex social–ecological systems," Ecological Economics, Elsevier, vol. 88(C), pages 185-194.
  12. McCann, Laura & Colby, Bonnie & Easter, K. William & Kasterine, Alexander & Kuperan, K.V., 2005. "Transaction cost measurement for evaluating environmental policies," Ecological Economics, Elsevier, vol. 52(4), pages 527-542, March.
  13. McCann, Laura, 2013. "Transaction costs and environmental policy design," Ecological Economics, Elsevier, vol. 88(C), pages 253-262.
  14. Edella Schlager & Elinor Ostrom, 1992. "Property-Rights Regimes and Natural Resources: A Conceptual Analysis," Land Economics, University of Wisconsin Press, vol. 68(3), pages 249-262.
  15. Hearne, Robert R. & Easter, K. William, 1997. "The economic and financial gains from water markets in Chile," Agricultural Economics: The Journal of the International Association of Agricultural Economists, International Association of Agricultural Economists, vol. 15(3), January.
  16. Dustin Garrick & Bruce Aylward, 2012. "Transaction Costs and Institutional Performance in Market-Based Environmental Water Allocation," Land Economics, University of Wisconsin Press, vol. 88(3), pages 536-560.
  17. Hearne, Robert R. & William Easter, K., 1997. "The economic and financial gains from water markets in Chile," Agricultural Economics, Blackwell, vol. 15(3), pages 187-199, January.
  18. Bauer, Carl J., 1997. "Bringing water markets down to earth: The political economy of water rights in Chile, 1976-1995," World Development, Elsevier, vol. 25(5), pages 639-656, May.
  19. Michael McKee & Kenneth Baker, 2000. "Increasingly Contested Property Rights and Trading in Environmental Amenities," Land Economics, University of Wisconsin Press, vol. 76(3), pages 333-344.
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Cited by:
  1. Marshall, Graham R., 2013. "Transaction Costs, Collective Action And Adaptation In Managing Social-Ecological Systems," 2013 Conference (57th), February 5-8, 2013, Sydney, Australia 152166, Australian Agricultural and Resource Economics Society.
  2. Crase, Lin & O'Keefe, Sue & Dollery, Brian, 2013. "Talk is cheap, or is it? The cost of consulting about uncertain reallocation of water in the Murray–Darling Basin, Australia," Ecological Economics, Elsevier, vol. 88(C), pages 206-213.
  3. McCann, Laura, 2013. "Transaction costs and environmental policy design," Ecological Economics, Elsevier, vol. 88(C), pages 253-262.
  4. Coggan, Anthea & Buitelaar, Edwin & Whitten, Stuart & Bennett, Jeff, 2013. "Factors that influence transaction costs in development offsets: Who bears what and why?," Ecological Economics, Elsevier, vol. 88(C), pages 222-231.
  5. Marshall, Graham R., 2013. "Transaction costs, collective action and adaptation in managing complex social–ecological systems," Ecological Economics, Elsevier, vol. 88(C), pages 185-194.

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