Market Mechanisms for Addressing Water Supply Needs
* What economic and institutional factors significantly affect decisions made by potential buyers and sellers in a water market, and how can prospective knowledge of those factors influence the form, structure, and operational rules of the market?
Need and Benefit
With growing water supply needs, and diminishing opportunities for cost effective water supply augmentation, it is frequently necessary to re-allocate water among uses and among users within a use. Markets have been developing in response to this need, but markets can be narrowly focused, rarely allow for contingent options, do not incorporate all the complexities for conjunctively managing ground and surface water, and are often administratively cumbersome.
This research would focus on questions related to the size of the market required to produce effective competition, the effect of leasing terms on annual leasing costs, the premium above current use values that is necessary to induce a sale or lease, the appropriate procedures for protecting third party impacts, and appropriate procedures for integrating ground and surface water effects.
Water markets are being considered or have been implemented in many river basins in which Reclamation projects represent a very significant portion of the available water supply (for example, the Central Valley, Klamath, North Platte, and Yakima projects). Developing improved market institutions that address the limitations of existing markets could substantially reduce the cost of meeting water supply needs, increase the likelihood that limited water will be allocated to where it is most valuable, and--in some cases--contribute to regional economic development. If water markets are structured to encourage voluntary participation by existing water rights holders, the potential for "win-win" water management is enhanced.
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