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

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

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.

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File URL: http://purl.umn.edu/19812
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Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2002 Annual meeting, July 28-31, Long Beach, CA with number 19812.

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Date of creation: 2002
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Handle: RePEc:ags:aaea02:19812
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  1. 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.
  2. Orley Ashenfelter & Janet Currie & Henry S. Farber & Matthew Spiegel, 1990. "An Experimental Comparison of Dispute Rates in Alternative Arbitration Systems," Working Papers 647, Princeton University, Department of Economics, Industrial Relations Section..
  3. James Murphy & Ariel Dinar & Richard Howitt & Steven Rassenti & Vernon Smith, 2000. "The Design of ``Smart'' Water Market Institutions Using Laboratory Experiments," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 17(4), pages 375-394, December.
  4. David E. Bloom, 1986. "Empirical Models of Arbitrator Behavior Under Conventional Arbitration," NBER Working Papers 1841, National Bureau of Economic Research, Inc.
  5. 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.
  6. Farber, Henry S & Bazerman, Max H, 1989. "Divergent Expectations as a Cause of Disagreement in Bargaining: Evidence from a Comparison of Arbitration Schemes," The Quarterly Journal of Economics, MIT Press, vol. 104(1), pages 99-120, February.
  7. 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.
  8. Farber, Henry S & Bazerman, Max H, 1987. "Why Is There Disagreement in Bargaining?," American Economic Review, American Economic Association, vol. 77(2), pages 347-52, May.
  9. 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 1276-83, December.
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