Spot Prices, Option Prices, and Water Markets: An Analysis of Emerging Markets in California
Most of the discussion of water markets revolves around the concept of trading permanent water rights, which implicitly assumes that the water property rights are adequately defined and transaction costs are not a significant barrier to trade. While this situation is relevant to several countries and areas in the U.S., there are many other regions where the transaction costs of trading permanent water rights are prohibitive. Given excessive costs for water rights trades, there is still significant potential for the market reallocation of water, using annual spot markets for times of scarcity and option markets for longer-term contracts.
KeywordsTransaction Cost Option Price Spot Market Water Sale Option Market
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