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Mechanisms For Addressing Third-Party Impacts Resulting From Voluntary Water Transfers

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Author Info

  • Murphy, James J.
  • Dinar, Ariel
  • Howitt, Richard E.
  • Mastrangelo, Erin
  • Rassenti, Stephen J.
  • Smith, Vernon L.

Abstract

This research uses laboratory experiments to test alternative water market institutions designed to protect third-party interests. The institutions tested include taxing mechanisms that raise revenue to compensate affected third-parties, and a free market in which third-parties actively participate. We also discuss the likely implications of a command-and-control approach in which there are fixed limits on the volume of water that may be exported from a region. The results indicate that there are some important trade-offs in selecting a policy option. Although theoretically optimal, active third-party participation in the market is likely to result in free-riding that may erode some or all of the efficiency gains, and may introduce volatility into the market. Fixed limits on water exports are likely to result in a more stable market, but the constraints on exports will result in lower levels of social welfare. Taxing transfers and compensating third-parties offers a promising balance of efficiency, equity and market stability.

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Bibliographic Info

Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2002 Annual meeting, July 28-31, Long Beach, CA with number 19812.

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Date of creation: 2002
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Handle: RePEc:ags:aaea02:19812

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Keywords: Resource /Energy Economics and Policy;

References

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  1. Henry S. Farber & Max H. Bazerman, 1989. "Divergent Expectations as a Cause of Disagreement in Bargaining: Evidence from a Comparison of Arbitration Schemes."," NBER Working Papers 2139, National Bureau of Economic Research, Inc.
  2. McCabe, Kevin A. & Rassenti, Stephen J. & Smith, Vernon L., 1989. "Designing `smart' computer-assisted markets : An experimental auction for gas networks," European Journal of Political Economy, Elsevier, vol. 5(2-3), pages 259-283.
  3. Orley Ashenfelter & Janet Currie & Henry S. Farber & Matthew Spiegel, 1990. "An Experimental Comparison of Dispute Rates in Alternative Arbitration Systems," Working Papers 647, Princeton University, Department of Economics, Industrial Relations Section..
  4. David E. Bloom, 1986. "Empirical Models of Arbitrator Behavior Under Conventional Arbitration," NBER Working Papers 1841, National Bureau of Economic Research, Inc.
  5. Farber, Henry S & Bazerman, Max H, 1989. "Divergent Expectations as a Cause of Disagreement in Bargaining: Evidence from a Comparison of Arbitration Schemes," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(1), pages 99-120, February.
  6. James Murphy & Ariel Dinar & Richard Howitt & Steven Rassenti & Vernon Smith, 2000. "The Design of ``Smart'' Water Market Institutions Using Laboratory Experiments," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 17(4), pages 375-394, December.
  7. McCabe, Kevin A & Rassenti, Stephen J & Smith, Vernon L, 1990. "Auction Institutional Design: Theory and Behavior of Simultaneous Multiple-Unit Generalizations of the Dutch and English Auctions," American Economic Review, American Economic Association, vol. 80(5), pages 1276-83, December.
  8. McCabe, Kevin A. & Rassenti, Stephen J. & Smith, Vernon L., 1990. "Auction design for composite goods : The natural gas industry," Journal of Economic Behavior & Organization, Elsevier, vol. 14(1), pages 127-149, September.
  9. Farber, Henry S & Bazerman, Max H, 1987. "Why Is There Disagreement in Bargaining?," American Economic Review, American Economic Association, vol. 77(2), pages 347-52, May.
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Cited by:
  1. Msangi, Siwa & Howitt, Richard E., 2006. "Income Distributional Effects of Using Market-Based Instruments for Managing Common Property Resources," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia, International Association of Agricultural Economists 25247, International Association of Agricultural Economists.
  2. Hansen, Kristiana & Kaplan, Jonathan D. & Kroll, Stephan, 2008. "Valuing Options in Water Markets: A Laboratory Investigation," Working Papers, Colorado State University, Department of Agricultural and Resource Economics 108722, Colorado State University, Department of Agricultural and Resource Economics.
  3. Hanak, Ellen, 2003. "Stopping The Drain: Third-Party Resistance To Water Marketing In California," 2003 Annual meeting, July 27-30, Montreal, Canada, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 22099, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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