Expected Transaction Costs and Incentives for Water Market Development
California provides the opportunity to analyze both the potential social gains from water transfers and the institutional constraints, including transaction costs, that can limit water market performance. Common law principles, constitutional provisions, State and Federal statutes, court decisions, water agency policy and contracts all govern how water is developed, allocated and used (xcState of California, 1995). This complex institutional setting creates a heterogeneous system of water-use rights resulting in uncertainty regarding the precise legal entitlements conferred with use rights. State and Federal law and policy governing water transfers and liability for any related economic and environmental impacts have been clarified over the past ten years to facilitate water market development. Despite these clarifications, uncertainty regarding use rights, transfer procedures, and transaction costs remains. As a consequence, water markets are yet to develop as anticipated. Drawing on recent experience, this chapter explores both the potential for social gains-from-trade in water-use rights and the institutional barriers constraining such trade, particularly focusing on the impact of heterogeneous water-use rights and transaction costs.
KeywordsTransaction Cost Water Allocation Water Transfer Water Market Water District
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