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Mechanisms For Addressing Third-Party Impacts Resulting From Voluntary Water Transfers

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  • Murphy, James J.
  • Dinar, Ariel
  • Howitt, Richard E.
  • Mastrangelo, Erin
  • Rassenti, Stephen J.
  • Smith, Vernon L.

Abstract

This research uses laboratory experiments to test alternative water market institutions designed to protect third-party interests. The institutions tested include taxing mechanisms that raise revenue to compensate affected third-parties, and a free market in which third-parties actively participate. We also discuss the likely implications of a command-and-control approach in which there are fixed limits on the volume of water that may be exported from a region. The results indicate that there are some important trade-offs in selecting a policy option. Although theoretically optimal, active third-party participation in the market is likely to result in free-riding that may erode some or all of the efficiency gains, and may introduce volatility into the market. Fixed limits on water exports are likely to result in a more stable market, but the constraints on exports will result in lower levels of social welfare. Taxing transfers and compensating third-parties offers a promising balance of efficiency, equity and market stability.

Suggested Citation

  • Murphy, James J. & Dinar, Ariel & Howitt, Richard E. & Mastrangelo, Erin & Rassenti, Stephen J. & Smith, Vernon L., 2002. "Mechanisms For Addressing Third-Party Impacts Resulting From Voluntary Water Transfers," 2002 Annual meeting, July 28-31, Long Beach, CA 19812, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  • Handle: RePEc:ags:aaea02:19812
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    References listed on IDEAS

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    1. Ashenfelter, Orley, et al, 1992. "An Experimental Comparison of Dispute Rates in Alternative Arbitration Systems," Econometrica, Econometric Society, vol. 60(6), pages 1407-1433, November.
    2. McCabe, Kevin A. & Rassenti, Stephen J. & Smith, Vernon L., 1990. "Auction design for composite goods : The natural gas industry," Journal of Economic Behavior & Organization, Elsevier, vol. 14(1), pages 127-149, September.
    3. McCabe, Kevin A & Rassenti, Stephen J & Smith, Vernon L, 1990. "Auction Institutional Design: Theory and Behavior of Simultaneous Multiple-Unit Generalizations of the Dutch and English Auctions," American Economic Review, American Economic Association, vol. 80(5), pages 1276-1283, December.
    4. Henry S. Farber & Max H. Bazerman, 1987. "Divergent Expectations as a Cause of Disagreement in Bargaining: Evidence from a Comparison of Arbitration Schemes."," NBER Working Papers 2139, National Bureau of Economic Research, Inc.
    5. Bloom, David E, 1986. "Empirical Models of Arbitrator Behavior under Conventional Arbitration," The Review of Economics and Statistics, MIT Press, vol. 68(4), pages 578-585, November.
    6. James Murphy & Ariel Dinar & Richard Howitt & Steven Rassenti & Vernon Smith, 2000. "The Design of ``Smart'' Water Market Institutions Using Laboratory Experiments," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 17(4), pages 375-394, December.
    7. Farber, Henry S & Bazerman, Max H, 1987. "Why Is There Disagreement in Bargaining?," American Economic Review, American Economic Association, vol. 77(2), pages 347-352, May.
    8. Henry S. Farber & Max H. Bazerman, 1989. "Divergent Expectations as a Cause of Disagreement in Bargaining: Evidence from a Comparison of Arbitration Schemes," The Quarterly Journal of Economics, Oxford University Press, vol. 104(1), pages 99-120.
    9. McCabe, Kevin A. & Rassenti, Stephen J. & Smith, Vernon L., 1989. "Designing `smart' computer-assisted markets : An experimental auction for gas networks," European Journal of Political Economy, Elsevier, vol. 5(2-3), pages 259-283.
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    Cited by:

    1. Siwa Msangi & Richard E. Howitt, 2007. "Income distributional effects of using market-based instruments for managing common property resources," Agricultural Economics, International Association of Agricultural Economists, vol. 37(s1), pages 249-259, December.
    2. Kristiana Hansen & Jonathan Kaplan & Stephan Kroll, 2014. "Valuing Options in Water Markets: A Laboratory Investigation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 57(1), pages 59-80, January.
    3. Hanak, Ellen, 2003. "Stopping The Drain: Third-Party Resistance To Water Marketing In California," 2003 Annual meeting, July 27-30, Montreal, Canada 22099, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Raffensperger, John F., 2011. "Matching users' rights to available groundwater," Ecological Economics, Elsevier, vol. 70(6), pages 1041-1050, April.

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    Resource /Energy Economics and Policy;

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