IDEAS home Printed from
   My bibliography  Save this paper

Designing water institutions : market failures and institutional response


  • Livingston, Marie Leigh
  • DEC


To foster economic efficiency, says the author, rights to water resources must be both secure and flexible. Designing institutions to deal with the physical peculiarities of water in a way that establishes sensible incentives and efficient resource use is complicated. Basically, establishing security in water rights requires protecting water users against intrusion by others. This is challenging, since water users are naturally interdependent. Security does not mean that one must be guaranteed an exact amount of water all the time. Rather, it means knowing the probability of water availability and being certain about allocation procedures under changing circumstances. Economic efficiency in water allocation in response to short-term supply changes (such as droughts) requires that economically sensitive sectors take precedence over less sensitive or more adaptive sectors. This can be accomplished through markets or administratively (by government agenciesor private water user groups). In a market scheme, rights must be differentiated according to the probability of receiving water in times of shortage. Those with high-value uses can then either acquire high-probability rights permanently or negotiate an option to be exercised only in drought years. There is less agreement among experts about how to design institutions to provide flexible water allocation in response to long-run changes in demand. Certainly no one interested in economic efficiency would suggest either a complete ban on transfers or completely unrestrained transfers. The difficulty is to ensure that water transactions allow economic development do not impose externalities on other water users. Market mechanisms for water transfer can entail substantial transaction costs, which threaten to delay or stymie transfers altogether. Moreover, third-party and community effects continue to concern those involved in water transfers. Local citizens and officials raise issues about the distribution of economic activity rather than its aggregate level (economic efficiency). Perhaps these issues are negligible when the amount of water transferred is small in proportion to total supply. But when the transfer threatens a community's economic base, these concerns deserve more consideration. Successful water institutions require a delicate interplay between administrative and market control. Institutions establish the basis for markets and can assure competitive conditions. Water agencies will always be involved in allocation, given the economies of scale in centralized water management. The challenge for water professionals is to structure institutions so that they foster sound economic development.

Suggested Citation

  • Livingston, Marie Leigh & DEC, 1993. "Designing water institutions : market failures and institutional response," Policy Research Working Paper Series 1227, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1227

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. A. Allan Schmid, 1972. "Analytical Institutional Economics: Challenging Problems in the Economics of Resources for a New Environment," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 54(5), pages 893-901.
    2. Marie Leigh Livingston & Thomas A. Miller, 1986. "A Framework for Analyzing the Impact of Western Instream Water Rights on Choice Domains: Transferability, Externalities, and Consumptive Use," Land Economics, University of Wisconsin Press, vol. 62(3), pages 269-277.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Chokri Dridi & Madhu Khanna, 2005. "Irrigation Technology Adoption and Gains from Water Trading under Asymmetric Information," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(2), pages 289-301.
    2. Dridi, Chokri & Khanna, Madhu, 2003. "Efficacy Of Water Trading Under Asymmetric Information And Implications For Technology Adoption," 2003 Annual meeting, July 27-30, Montreal, Canada 22140, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Bauer, Carl J., 1997. "Bringing water markets down to earth: The political economy of water rights in Chile, 1976-1995," World Development, Elsevier, vol. 25(5), pages 639-656, May.


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1227. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.