Mechanisms for Addressing Third-Party Impacts Resulting From Voluntary Water Transfers
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 effic iency 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.
Murphy, James J., Ariel Dinar, Richard E. Howitt, Erin Mastrangelo, Stephen Rassenti, and Vernon L. Smith. “Mechanisms for Addressing Third-Party Impacts Resulting From Voluntary Water Transfers.” American Agricultural Economics Association Annual Meeting, Long Beach, CA. 28-31 July 2002. UMass Dept. of Resource Economics Working Paper 2003-07. Web.
University of Massachussetts