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Water Markets, Water Rights and Economic Efficiency

Author

Listed:
  • Zaeske, Andrew L.

    (Independent Consultant)

  • Krishnamurthy, Chandra Kiran B.

    (CERE, Center for Environmental and Resource Economics, and Department of Forest Economics, Swedish University of Agricultural Sciences, Umeå)

Abstract

Markets for water are increasingly being viewed as important mechanisms for significantly enhancing the allocative efficiency of water in the presence of impediments to altering water rights allocations, particularly under conditions of scarcity. This article seeks to understand the conditions under which allocative efficiency is attained by markets for water in the presence of pre-existing legal entitlements to water. Using a production model with a single input, water from a common source, two insights are provided. The first relates to an equivalence result: legal allocation of water rights which leave no producer with a negative marginal product can be replicated by a planner via planning weights (meaning considerations other than productivity can be accommodated) or by a market with an endogenous single-water-price. In view of the ubiquity of producers with negative marginal products in reality, market outcomes need not be efficient. Secondly, sufficient conditions for a market to lead to allocative efficiency, which includes homogeneity among producers, are so stringent as to not be relevant for most settings. Our results suggest that markets for water face many limitations in attaining allocative efficiency.

Suggested Citation

  • Zaeske, Andrew L. & Krishnamurthy, Chandra Kiran B., 2017. "Water Markets, Water Rights and Economic Efficiency," CERE Working Papers 2017:2, CERE - the Center for Environmental and Resource Economics, revised 09 Oct 2023.
    • Handle: RePEc:hhs:slucer:2017_002
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    Citations

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    Cited by:

    1. Till Proeger & Lukas Meub & Kilian Bizer, 2018. "Laboratory Experiments of Tradable Development Rights: A Synthesis of Different Treatments," Sustainability, MDPI, vol. 10(6), pages 1-19, June.
    2. Delorit, Justin D. & Parker, Dominic P. & Block, Paul J., 2019. "An agro-economic approach to framing perennial farm-scale water resources demand management for water rights markets," Agricultural Water Management, Elsevier, vol. 218(C), pages 68-81.
    3. Proeger, Till & Meub, Lukas & Bizer, Kilian, 2017. "The role of communication on an experimental market for tradable development rights," Land Use Policy, Elsevier, vol. 68(C), pages 614-624.

    More about this item

    Keywords

    markets; water rights; allocative efficiency; social welfare; copula;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • Q10 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - General
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

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