MECHANISMS FOR ADDRESSING THIRD-PARTY IMPACTS RESULTING FROM VOLUNTARY WATER TRANSFERS

James J. Murphy (), Ariel Dinar (), Richard Howitt, Erin Mastrangelo, Stephen Rassenti and Vernon Smith

No 19812, 2002 Annual meeting, July 28-31, Long Beach, CA from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: This research uses laboratory experiments to test alternative water market institutions designed to protect third-party interests. The institutions tested include taxing mechanisms that raise revenue to compensate affected third-parties, and a free market in which third-parties actively participate. We also discuss the likely implications of a command-and-control approach in which there are fixed limits on the volume of water that may be exported from a region. The results indicate that there are some important trade-offs in selecting a policy option. Although theoretically optimal, active third-party participation in the market is likely to result in free-riding that may erode some or all of the efficiency gains, and may introduce volatility into the market. Fixed limits on water exports are likely to result in a more stable market, but the constraints on exports will result in lower levels of social welfare. Taxing transfers and compensating third-parties offers a promising balance of efficiency, equity and market stability.

Keywords: Resource /Energy Economics and Policy (search for similar items in EconPapers)
Date: 2002
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