Pricing Mechanisms for Surface Water Rights: Trading with a Common Pool

Sanchari Ghosh () and Keith Willett ()
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Sanchari Ghosh: Northeastern State University
Keith Willett: Oklahoma State Univeristy

No 1704, Economics Working Paper Series from Oklahoma State University, Department of Economics and Legal Studies in Business

Abstract: Economic studies have shown that when instream flow constraints are binding and surface water possesses public good characteristics, water transfers on the basis of consumptive use will lead to third party externalities and often entail high transaction costs. One major reason is the dominance of bilateral trading or multilateral trading having a high likelihood of strategic behavior. This paper proposes an alternative institutional arrangement called smart markets which maximize the aggregate efficiency gains from trading by allowing trades to be consummated through a common pool. The analytical model with instream flow constraints being binding, shows, that the shadow prices evolving from the centralized solution, incorporates the third party external costs imposed by any trader. Thus the financial burden of compensating victims who are affected by lower flows downstream or insufficient availability of water for diversions, are avoided.

Keywords: consumptive use rights; inflow stream rights; water rights markets; third-party externalities; computer-assisted smart markets (search for similar items in EconPapers)
JEL-codes: Q25 Q28 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016-09
New Economics Papers: this item is included in nep-agr and nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:okl:wpaper:1704

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