CERE Working Papers,
CERE - the Center for Environmental and Resource Economics

Abstract: Markets for water are increasingly being viewed as important mechanisms for significantly enhancing the allocative efficiency of water in the presence of impediments to altering water rights allocations, particularly under conditions of scarcity. This article seeks to understand the conditions under which allocative efficiency is attained by markets for water in the presence of pre-existing legal entitlements to water. Using a production model with a single input, water from a common source, two insights are provided. The first relates to an equivalence result: legal allocation of water rights which leave no producer with a negative marginal product can be replicated by a planner via planning weights (meaning considerations other than productivity can be accommodated) or by a market with an endogenous single-water-price. In view of the ubiquity of producers with negative marginal products in reality, market outcomes need not be efficient. Secondly, sufficient conditions for a market to lead to allocative efficiency, which includes homogeneity among producers, are so stringent as to not be relevant for most settings. Our results suggest that markets for water face many limitations in attaining allocative efficiency.

Keywords: markets; water rights; allocative efficiency; social welfare; copula

JEL-codes: D61; Q10; Q25

Language: English

46 pages, First version: March 22, 2017. Revised: October 9, 2023. Earlier revisions: October 3, 2023.

Full text files

papers.cfm?abstract_id=2957456  Full text

Download statistics

• CERE - the Center for Environmental and Resource Economics
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Mona Bonta Bergman ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:slucer:2017_002This page generated on 2024-09-13 22:17:06.