Estimating the long-term impact of market power on the welfare gains from groundwater markets

Athanasios Tsiarapas () and Zisis Mallios ()
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Athanasios Tsiarapas: Aristotle University of Thessaloniki
Zisis Mallios: Aristotle University of Thessaloniki

Environmental Economics and Policy Studies, 2023, vol. 25, issue 3, No 4, 377-406

Abstract: Abstract Water markets are considered an effective groundwater management instrument. However, the emergence of market power during their operation, i.e., price manipulation, cannot be excluded. In this paper, a simple water market between two groups of farmers is modeled and an attempt is made firstly to quantify the loss of aggregate total benefits during a given planning period from the occurrence of market power in this market using a "structural model" to describe the market conditions and solving an optimal control problem and secondly to determine the initial allocation of water rights that limits the loss of benefits due to market power. The results of simulations based on hydro-economic data of a region in Northern Greece lead to two conclusions. The first conclusion is that the loss of aggregate total benefit is likely to reach even $$10\%$$ 10 % compared to perfect competition when there is a full monopoly or monopsony in the water market. The second conclusion is that an initial allocation close to the quantities consumed by each group under perfect competition leads to a limitation of the impact of market power on the aggregate total benefit gained by the two groups of farmers during the planning period.

Keywords: Groundwater markets; Market power; Optimal control; Initial allocation; Total net benefit (search for similar items in EconPapers)
JEL-codes: D4 Q25 Q50 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10018-023-00368-y

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