The Future of Water Markets: A Realistic Perspective
Although the experience with water markets is still limited, this situation is likely to change as more areas are faced with water scarcity problems and must look for better ways to reallocate this scarce resource. Under the appropriate conditions, it seems clear that water markets can be superior mechanisms for reallocating water to meet changing demand. A key reason to use water markets as the reallocation mechanism is because they give both potential buyers and sellers an incentive to conserve water and to participate in bringing about an equitable and efficient water reallocation. Markets also reduce the potential for rent-seeking by government officials. Trades can lead to permanent or temporary (during periods of drought) reallocations. If the reallocation of water rights is permanent, or between sectors, formal markets will need to be developed. In contrast, if the reallocation is only temporary and within the agricultural sector, then informal markets will usually work.
KeywordsTransaction Cost Water Allocation Spot Market Option Market Water Market
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