Water Markets and Trading

Posted: 10 Jan 2008

See all articles by Howard G. Chong

Howard G. Chong

University of California, Berkeley

David L. Sunding

University of California, Berkeley - The Richard & Rhoda Goldman School of Public Policy

Abstract

Since the 1970s, supply augmentation strategies to meet water needs have waned, and governments have increasingly focused on demand management measures, including voluntary water transfers. Water demands have also changed as expanding urban growth, changes in agriculture, and increasing concern for the environment compete for water. Water rights regimes based on queuing principles lead to an inefficient allocation of water resources and may also result in other inefficiencies, such as overuse of land and inadequate adoption of capital-intensive conservation technologies. Water trading based on transferable water rights has been advanced as a solution to these problems. Trading helps equalize the marginal prices faced by various water users, thereby providing information about the value of water in alternative uses and creating compatible incentives. Putting water markets into practice introduces real-world complications of transaction costs and third-party externalities. We present these complications along with some major criticisms of water markets, and actual cases of water trading are discussed. We conclude with avenues of potential future research.

Keywords: water trading, transaction costs, third-party effects, socioeconomic impacts, property rights, drought

Suggested Citation

Chong, Howard G. and Sunding, David L., Water Markets and Trading. Annual Review of Environment and Resources, Vol. 31, November 2006, Available at SSRN: https://ssrn.com/abstract=1081941

Howard G. Chong (Contact Author)

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

David L. Sunding

University of California, Berkeley - The Richard & Rhoda Goldman School of Public Policy ( email )

Center for Sustainable Resource Development and Cooperative
Berkeley, CA 94720
United States

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