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The Effects Of Spot Water Markets On The Economic Risk Derived From Variable Water Supply

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  • Calatrava-Requena, Javier
  • Garrido, Alberto
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    Abstract

    Water availability in semiarid regions commonly exhibits patterns of extreme variability. Even in basins with large infrastructure development, some users are subject to low levels of water reliability, incurring economic losses during periods of scarcity. More flexible instruments, such as voluntary exchanges of water among users, may help users reduce their risk exposure. Recent changes in the Spanish water Law have given an initial impulse to allow for lease-out contracts of water use rights. This paper analyses, from theoretical and empirical standpoints, the effect that establishing water markets has on the economic risk caused by water availability variations. The empirical study is performed on an irrigation district of the Guadalquivir Valley (Spain) with fair levels of average water availability but a high probability of periods of extreme scarcity. A non-linear programming model is used to simulate irrigators' behaviour and derive water demand functions. Another spatial equilibrium model is used to compute market exchange and equilibrium. These programming models are combined with statistical simulation techniques. It is shown that the probability distribution of profits for a representative irrigator is modified if water exchanges are authorised, resulting in unambiguous risk reductions. Results also suggests that if the market would be extended to several irrigation districts and users, each characterised by different hydrological risk exposure, the occurrence of extremely low benefits events would become more unlikely. In sum, it is shown that exchanging water in annual spot markets allows for the reduction of farmers' economic vulnerability caused by the variability of water supply across irrigation seasons.

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    File URL: http://purl.umn.edu/25885
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    Bibliographic Info

    Paper provided by International Association of Agricultural Economists in its series 2003 Annual Meeting, August 16-22, 2003, Durban, South Africa with number 25885.

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    Date of creation: 2003
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    Handle: RePEc:ags:iaae03:25885

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    Keywords: Resource /Energy Economics and Policy;

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    1. Rosegrant, Mark W. & Binswanger, Hans P., 1994. "Markets in tradable water rights: Potential for efficiency gains in developing country water resource allocation," World Development, Elsevier, vol. 22(11), pages 1613-1625, November.
    2. Kling, Catherine L. & Weinberg, Marca & Wilen, James, 1993. "Water Markets and Water Quality," Staff General Research Papers 1572, Iowa State University, Department of Economics.
    3. Dinar, Ariel & Letey, J., 1991. "Agricultural water marketing, allocative efficiency, and drainage reduction," Journal of Environmental Economics and Management, Elsevier, vol. 20(3), pages 210-223, May.
    4. Michael D. Rosen & Richard J. Sexton, 1993. "Irrigation Districts and Water Markets: An Application of Cooperative Decision-Making Theory," Land Economics, University of Wisconsin Press, vol. 69(1), pages 39-53.
    5. Dinar, Ariel & Wolf, Aaron, 1994. "Economic potential and political considerations of regional water trade: The Western Middle East example," Resource and Energy Economics, Elsevier, vol. 16(4), pages 335-356, November.
    6. Booker J. F. & Young R. A., 1994. "Modeling Intrastate and Interstate Markets for Colorado River Water Resources," Journal of Environmental Economics and Management, Elsevier, vol. 26(1), pages 66-87, January.
    7. R. Maria Saleth & John B. Braden & J. Wayland Eheart, 1991. "Bargaining Rules for a Thin Spot Water Market," Land Economics, University of Wisconsin Press, vol. 67(3), pages 326-339.
    8. Becker, Nir, 1995. "Value of moving from central planning to a market system: lessons from the Israeli water sector," Agricultural Economics, Blackwell, vol. 12(1), pages 11-21, April.
    9. Hearne, R.R. & Easter, K.W., 1995. "Water Allocation and Water Markets. An Analysis of Gains-from-Trade in Chile," Papers 315, World Bank - Technical Papers.
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    Cited by:
    1. Curtis, Kynda R. & Bishop, Carol & Harris, Thomas R., 2009. "Economics of Alternative Crop Production in Arid Regions," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia 48053, Australian Agricultural and Resource Economics Society.
    2. Reto Foellmi & Urs Meister, 2004. "Enhancing Efficiency of Water Supply - Product Market Compoetition versus Trade," Working Papers 0025, University of Zurich, Institute for Strategy and Business Economics (ISU).

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