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Privatization of Water-Resource Development


  • Stephen Holland



This paper analyzes the inefficiencies from market power and return-flow externalities in private construction of a water project. The model pays special attention to increasing groundwater pumping costs, project set-up costs, limited project capacity, and return flow to the aquifer. For a given capacity, the return-flow externality causes project owners to construct the project too late when the price of groundwater is too high because the external benefit of return-flow to the aquifer is not captured. Market power exacerbates these effects since the project owner delays construction to accelerate groundwater overdraft. The return-flow externality and market power also decrease installed capacity and increase overdraft from the aquifer. Applying the model to the construction of the Central Arizona Project (CAP) for a given capacity, the estimated deadweight loss from hypothetical private construction of the project ($0.853 billion) is substantially less than the literature’s estimate of deadweight loss from actual construction by the Bureau of Reclamation ($2.603 billion). However, under the federal subsidies and insecure property rights that accompanied the CAP, private construction results in a larger estimated efficiency loss ($6.126 billion). Copyright Springer 2006

Suggested Citation

  • Stephen Holland, 2006. "Privatization of Water-Resource Development," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 34(2), pages 291-315, June.
  • Handle: RePEc:kap:enreec:v:34:y:2006:i:2:p:291-315
    DOI: 10.1007/s10640-006-0002-3

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    Cited by:

    1. Ansink, Erik & Houba, Harold, 2012. "Market power in water markets," Journal of Environmental Economics and Management, Elsevier, vol. 64(2), pages 237-252.
    2. Elham Erfanian & Alan R. Collins, 2017. "Charges for Water and Access: What Explains the Differences in West Virginia Municipalities?," Working Papers Working Paper 2017-02, Regional Research Institute, West Virginia University.
    3. Sheila M. Olmstead, 2010. "The Economics of Managing Scarce Water Resources," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 4(2), pages 179-198, Summer.
    4. Ujjayant Chakravorty & Eithan Hochman & Chieko UmetsuAuthor-Name: David Zilberman, 2004. "Privatizing Water Distribution," Emory Economics 0403, Department of Economics, Emory University (Atlanta).

    More about this item


    Central Arizona Project; groundwater; optimal control; privatization; return flow; surface water; water; water project construction; H0; L9; Q2; Q3;

    JEL classification:

    • H0 - Public Economics - - General
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation


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