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Spot water markets and risk in water supply


  • Javier Calatrava
  • Alberto Garrido


Water availability patterns in semiarid regions are typically extremely variable. Even in basins with a highly developed infrastructure, users are subject to unreliable water supplies, incurring substantial economic losses during periods of scarcity. More flexible instruments, such as voluntary exchanges of water among users, can help users to reduce risk exposure. This article looks at the effects of spot water markets on the economic risk caused by water availability variations. Our theoretical and empirical risk analyses are based on the random profits of water users. Profit probability density functions are formally and graphically characterized for both water sellers and buyers under several possible market outcomes. We conclude from this analysis that, where water supply is stochastic, water markets unambiguously reduce both parties' risk exposure. The empirical study is conducted on an irrigation district in the Guadalquivir Valley (Southern Spain), where there is a high probability of periods of extreme water scarcity. Water demand functions for the district representative irrigators and a spatial equilibrium model are used to simulate market exchanges and equilibrium. This programming model is combined with statistical simulation techniques. We show that the profit probability distribution of a representative irrigator is modified if water exchanges are authorized, leading to risk reductions. Results also indicate that if the market were extended to several districts and users that are subject to varying hydrological risk exposure, extremely low-profit events would be less likely to occur. In sum, we show that exchanging water in annual spot markets can reduce farmers' economic vulnerability caused by water supply variability across irrigation seasons. These results support the water policy reform carried out in Spain in 1999 to allow for voluntary water exchanges among right holders. Copyright 2005 International Association of Agricultural Economics.

Suggested Citation

  • Javier Calatrava & Alberto Garrido, 2005. "Spot water markets and risk in water supply," Agricultural Economics, International Association of Agricultural Economists, vol. 33(2), pages 131-143, September.
  • Handle: RePEc:bla:agecon:v:33:y:2005:i:2:p:131-143

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    References listed on IDEAS

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    Cited by:

    1. Bontems, Philippe & Nauges, Céline, 2017. "Production choices with water markets: The role of initial allocations and forward trading," TSE Working Papers 17-812, Toulouse School of Economics (TSE).
    2. Broadbent, Craig D. & Brookshire, David S. & Coursey, Don & Tidwell, Vince, 2014. "An experimental analysis of water leasing markets focusing on the agricultural sector," Agricultural Water Management, Elsevier, vol. 142(C), pages 88-98.
    3. Alberto Garrido, 2007. "Water markets design and evidence from experimental economics," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 38(3), pages 311-330, November.
    4. Calatrava-Leyva, Javier & Martinez-Granados, David, 2012. "El valor del uso del agua en el regadío de la cuenca del Segura y en las zonas regables del trasvase Tajo-Segura," Economia Agraria y Recursos Naturales, Spanish Association of Agricultural Economists, vol. 12(1).
    5. Qureshi, M. Ejaz & Shi, Tian & Qureshi, Sumaira E. & Proctor, Wendy, 2009. "Removing barriers to facilitate efficient water markets in the Murray-Darling Basin of Australia," Agricultural Water Management, Elsevier, vol. 96(11), pages 1641-1651, November.
    6. M Ejaz Qureshi & Tian Shi & Sumaira Qureshi & Wendy Proctor & Mac Kirby, 2009. "Removing Barriers to Facilitate Efficient Water Markets in the Murray Darling Basin – A Case Study from Australia," Socio-Economics and the Environment in Discussion (SEED) Working Paper Series 2009-02, CSIRO Sustainable Ecosystems.
    7. Yerushalmi, Erez, 2012. "Measuring the administrative water allocation mechanism and agricultural amenities," The Warwick Economics Research Paper Series (TWERPS) 992, University of Warwick, Department of Economics.
    8. Takahashi, Taro & Aizaki, Hideo & Ge, Yingchun & Ma, Mingguo & Nakashima, Yasuhiro & Sato, Takeshi & Wang, Weizhen & Yamada, Nanae, 2013. "Agricultural water trade under farmland fragmentation: A simulation analysis of an irrigation district in northwestern China," Agricultural Water Management, Elsevier, vol. 122(C), pages 63-66.
    9. Dono, Gabriele & Cortignani, Raffaele & Dell'Unto, Davide & Deligios, Paola & Doro, Luca & Lacetera, Nicola & Mula, Laura & Pasqui, Massimiliano & Quaresima, Sara & Vitali, Andrea & Roggero, Pier Paol, 2016. "Winners and losers from climate change in agriculture: Insights from a case study in the Mediterranean basin," Agricultural Systems, Elsevier, vol. 147(C), pages 65-75.
    10. Zuo, Alec & Nauges, Celine & Wheeler, Sarah, 2012. "Water trading as a risk-management tool for farmers: new empirical evidence from the Australian water market," Risk and Sustainable Management Group Working Papers 149885, University of Queensland, School of Economics.
    11. Garrido, Alberto & Novo, Paula & Rodriguez Casado, Roberto & Varela-Ortega, Consuelo, 2009. "Can virtual water 'trade' reduce water scarcity in semi-arid countries? The case of Spain," 2009 Conference, August 16-22, 2009, Beijing, China 51048, International Association of Agricultural Economists.
    12. Marianne LEFEBVRE & Lata GANGADHARAN & Sophie THOYER, 2011. "Do Security-differentiated Water Rights Improve Efficiency?," Working Papers 11-14, LAMETA, Universtiy of Montpellier, revised Jun 2012.
    13. Novo, P. & Garrido, A. & Varela-Ortega, C., 2009. "Are virtual water "flows" in Spanish grain trade consistent with relative water scarcity?," Ecological Economics, Elsevier, vol. 68(5), pages 1454-1464, March.
    14. Gholamreza Soltani, 2013. "Agricultural Water-Use Efficiency in a Global Perspective: The Case of Iran," Working Papers 778, Economic Research Forum, revised Oct 2013.
    15. G. R. Soltani & M. Bakhshoodeh & M. Zibaei, 2009. "Optimization of Agricultural Water Use and Trade Patterns: The Case of Iran," Working Papers 508, Economic Research Forum, revised Dec 2009.
    16. Mukherjee, Monobina & Schwabe, Kurt A., 2012. "Valuing Access To Multiple Water Supply Sources In Irrigated Agriculture With A Hedonic Pricing Model," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124604, Agricultural and Applied Economics Association.

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