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Droughts, Deluges, and (River) Diversions: Valuing Market-Based Water Reallocation

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  • Will Rafey

Abstract

This paper develops and applies a method to value water trading on a river network. The framework relies on regulatory variation in diversion caps to identify production functions for irrigated farms, then uses the estimated shadow values to assess the market's reallocation. I apply this framework to the largest water market in human history, located in southeastern Australia. Observed water trading increased output by 4–6 percent from 2007 to 2015, equivalent to avoiding an 8–12 percent uniform decline in water resources. Reallocation and average surplus both increase substantially during drought, implying that water markets can be most valuable when climatic variability is most severe.

Suggested Citation

  • Will Rafey, 2023. "Droughts, Deluges, and (River) Diversions: Valuing Market-Based Water Reallocation," American Economic Review, American Economic Association, vol. 113(2), pages 430-471, February.
    • Handle: RePEc:aea:aecrev:v:113:y:2023:i:2:p:430-71
    DOI: 10.1257/aer.20201434
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    Cited by:

    1. Bahrami, Shahin & Rouhi Rad, Mani & Nayga, Rodolfo M., 2023. "Saving the Colorado River Through Conservation Payments to Irrigated Agriculture," 2023 Annual Meeting, July 23-25, Washington D.C. 335920, Agricultural and Applied Economics Association.

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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