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Understanding the evolution and performance of water markets and allocation policy: A transaction costs analysis framework

  • Garrick, Dustin
  • Whitten, Stuart M.
  • Coggan, Anthea

Water markets and associated allocation policy reforms have struggled to achieve their intended goals in many water-stressed rivers, in part due to the institutional friction imposed by transition and transaction costs. This paper elaborates a transaction costs analysis framework to examine the evolution and performance of water markets and allocation policy reforms. This analysis rests on three pillars: i) a synthesis of three theoretical traditions of institutional analysis (Williamson, North, and Ostrom) often considered independently; ii) a framework to examine the types and interactions of transaction costs in market-based water allocation over time; and iii) an illustrative analysis of three large river basins – the Colorado, Columbia and Murray–Darling – with varying levels of success in market-based water policy reforms. The resulting framework accounts for water's complexity as an economic good. This framework and the case studies lead to the identification of several policy implications including the need for: a multiphase sequencing of reform, strategic investment in institutional transition costs, and institutional choices that preserve future flexibility to adjust water rights and diversion limits to manage social and environmental externalities.

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Article provided by Elsevier in its journal Ecological Economics.

Volume (Year): 88 (2013)
Issue (Month): C ()
Pages: 195-205

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Handle: RePEc:eee:ecolec:v:88:y:2013:i:c:p:195-205
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  1. Edella Schlager & Elinor Ostrom, 1992. "Property-Rights Regimes and Natural Resources: A Conceptual Analysis," Land Economics, University of Wisconsin Press, vol. 68(3), pages 249-262.
  2. Coggan, Anthea & Buitelaar, Edwin & Whitten, Stuart & Bennett, Jeff, 2013. "Factors that influence transaction costs in development offsets: Who bears what and why?," Ecological Economics, Elsevier, vol. 88(C), pages 222-231.
  3. McCann, Laura, 2013. "Transaction costs and environmental policy design," Ecological Economics, Elsevier, vol. 88(C), pages 253-262.
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  7. Marshall, Graham R., 2013. "Transaction costs, collective action and adaptation in managing complex social–ecological systems," Ecological Economics, Elsevier, vol. 88(C), pages 185-194.
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  12. McCann, Laura & Colby, Bonnie & Easter, K. William & Kasterine, Alexander & Kuperan, K.V., 2005. "Transaction cost measurement for evaluating environmental policies," Ecological Economics, Elsevier, vol. 52(4), pages 527-542, March.
  13. Jaffe, Adam B. & Newell, Richard G. & Stavins, Robert N., 2003. "Chapter 11 Technological change and the environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 11, pages 461-516 Elsevier.
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  15. Gary D. Libecap, 2009. "Chinatown Revisited: Owens Valley and Los Angeles--Bargaining Costs and Fairness Perceptions of the First Major Water Rights Exchange," Journal of Law, Economics and Organization, Oxford University Press, vol. 25(2), pages 311-338, October.
  16. Saleth, R. Maria & Dinar, Ariel, 1999. "Water challenge and institutional response (a cross-country perspective)," Policy Research Working Paper Series 2045, The World Bank.
  17. Howitt, Richard E., 1994. "Empirical analysis of water market institutions: The 1991 California water market," Resource and Energy Economics, Elsevier, vol. 16(4), pages 357-371, November.
  18. Crase, Lin & O'Keefe, Sue & Dollery, Brian, 2013. "Talk is cheap, or is it? The cost of consulting about uncertain reallocation of water in the Murray–Darling Basin, Australia," Ecological Economics, Elsevier, vol. 88(C), pages 206-213.
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