Spot Prices, Option Prices, and Water Markets: An Analysis of Emerging Markets in California

  • Richard E. Howitt
Part of the Natural Resource Management and Policy book series (NRMP, volume 15)


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.


Transaction Cost Option Price Spot Market Water Sale Option Market 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Black F., and M. Scholes, 1973. “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy, 81(3): 637–659.CrossRefGoogle Scholar
  2. Blomquist, W.A., 1992. Dividing the Waters: Governing Groundwater in Southern California, ICS Press, San Francisco.Google Scholar
  3. Clark, J.R, and S.R. Abt, 1993. “Temporary Water Transfers for Dry-Year Water Supply,” Water Resources Bulletin, 29(2): 249–255.Google Scholar
  4. Cox, J., S. Ross, and M. Rubinstein, 1979. “Option Pricing: A Simplified Approach,” Journal of Financial Economics, September, 6(1): 229–263.CrossRefGoogle Scholar
  5. Dixit A., 1993. The Art of Smooth Pasting, Harwood Academic Publishers, Chur Switzerland.Google Scholar
  6. Gray, B., 1996. A Model Water Transfer Act for California, California Business Roundtable, California Chamber of Commerce, California Farm Bureau Federation, California Manufacturers Association.Google Scholar
  7. Hamilton, J.R., N.K. Whittlesey, and P. Halvorson, 1989. “Interruptible Water Markets in the Pacific Northwest,” American Journal of Agricultural Economics, 71(1): 63–75.CrossRefGoogle Scholar
  8. Hartmen, L.M., and D. Seastone, 1970. Water Transfers: Economic Efficiency and Alternative Institutions. Johns Hopkins Press, Baltimore.Google Scholar
  9. Howe, C.W., J.K. Lazo, and K.R. Weber, 1990. “The Economic Impacts of Agriculture to Urban Water Transfer on the Area of Origin: A Case Study of the Arkansas River Valley in Colorado,” American Journal of Agricultural Economics, 72(5): 1200–1204.CrossRefGoogle Scholar
  10. Howitt, R.E, N. Moore, and R.T. Smith, 1992. A Retrospective on California’s 1991 Emergency Drought Water Ban. California Department of Water Resources, Sacramento.Google Scholar
  11. Howitt, R.E., 1995. “Malleable Property Rights and Smooth Pasting Conditions,” American Journal of Agricultural Economics, 77(5): 1192–1198.CrossRefGoogle Scholar
  12. Israel, M., and J.R. Lund, 1995. “Recent California Water Transfers: Implications for Water Management,” Natural Resources Journal, 35(1): 1–32.Google Scholar
  13. Jercich, S.A., 1997. “California’s 1995 Water Bank Program: Purchasing Water Supply Options,” Journal of Water Resources Planning and Management, 123(1): 59–65.CrossRefGoogle Scholar
  14. Knapp, K.C., and HJ. Vaux, 1982. “Barriers to Effective Groundwater Management: the California Case,” Ground-Water, Jan/Feb., 20(l):61–66.CrossRefGoogle Scholar
  15. Littleworth, A.L. and E. L. Garner, 1995. “California Water,” Solano Press, California.Google Scholar
  16. Merton, R., 1973. “The Theory of Rational Option Pricing,” Bell Journal of Economics and Management Science, 4(1): 141–183.CrossRefGoogle Scholar
  17. Michelson, A.M., and R.A Young, 1993. “Optioning Agricultural Water Rights for Urban Water Supplies During Drought,” American Journal of Agricultural Economics, 75(4): 1010–1020.CrossRefGoogle Scholar
  18. Saleth, R.M., J.B. Braden, and J.W. Eheart, 1991. “Bargaining Rules for a Thin Spot Water Market,” Land Economics, 67(3): 326–339.CrossRefGoogle Scholar
  19. Smith, C.W., 1976. “Option Pricing: A Review,” Journal of Financial Economics, 3(1): 3–51.CrossRefGoogle Scholar
  20. Vaux, H.J., and R.E Howitt, 1984. “Managing Water Scarcity: An Evaluation of Interregional Transfers,” Water Resources Research, 20(7): 785–792.CrossRefGoogle Scholar
  21. Watters, P., 1995. “Efficient Pricing of Water Transfer Options: Nonstructural Solutions for Reliable Water Supplies,” unpublished Ph.D. Dissertation, Department of Economics, University of California, Riverside, California.Google Scholar

Copyright information

© Kluwer Academic Publishers 1998

Authors and Affiliations

  • Richard E. Howitt
    • 1
  1. 1.Department of Agricultural EconomicsUniversity of CaliforniaDavis

Personalised recommendations