Incorporating Instream Flow Values into a Water Market

University of Massachusetts Resource Economics Working Paper No. 2004-8

36 Pages Posted: 11 Oct 2004

See all articles by James J. Murphy

James J. Murphy

University of Alaska Anchorage

Ariel Dinar

World Bank - Agriculture and Rural Development Department

Richard E. Howitt

University of California, Davis

Stephen J. Rassenti

George Mason University - Interdisciplinary Center for Economic Science (ICES)

Vernon L. Smith

Chapman University - Economic Science Institute; Chapman University School of Law

Marca Weinberg

Department of Agriculture (USDA) - Economic Research Service (ERS) - Market & Trade Economics Division

Date Written: October 2004

Abstract

We use laboratory experiments to test three different water market institutions designed to incorporate instream flow values into the allocation. The institutions are (1) a baseline with fixed minimum flow constraints, (2) an environmental agent contributing to the cost of providing instream flows, and (3) creating an instream flow right in which an environmental agent can sell the right to reduced flows. Using a "smart" computer-coordinated market, we find that direct environmental participation in the market can achieve highly efficient and stable allocations. A particularly attractive and practical feature of the third institution is that it nests the status quo in the sense that, should the environmental agent choose not to participate in the market, the default minimum instream flow constraints will be maintained. Although flows may be lower in this institution relative to a fixed constraint on minimum flows, because these flow reductions are voluntary and compensated, all deviations from the status quo (i.e., binding flow constraints) are necessarily Pareto improving in the sense that no agent, including the environment, is made worse off.

Keywords: Water markets, water transfers, instream flows, experiments

JEL Classification: C91, C92, H41, Q25

Suggested Citation

Murphy, James J. and Dinar, Ariel and Howitt, Richard E. and Rassenti, Stephen J. and Smith, Vernon L. and Weinberg, Marca, Incorporating Instream Flow Values into a Water Market (October 2004). University of Massachusetts Resource Economics Working Paper No. 2004-8. Available at SSRN: https://ssrn.com/abstract=601343 or http://dx.doi.org/10.2139/ssrn.601343

James J. Murphy (Contact Author)

University of Alaska Anchorage ( email )

Anchorage, AK
United States
907-786-1936 (Phone)

HOME PAGE: http://faculty.cbpp.uaa.alaska.edu/jmurphy/

Ariel Dinar

World Bank - Agriculture and Rural Development Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-0434 (Phone)

Richard E. Howitt

University of California, Davis ( email )

One Shields Avenue
Department of Agricultural and Resource Economics
Davis, CA 95616
United States
(530) 752-1521 (Phone)

Stephen J. Rassenti

George Mason University - Interdisciplinary Center for Economic Science (ICES) ( email )

400P Truland Building
George Mason University
Fairfax, VA 22030
United States

Vernon L. Smith

Chapman University - Economic Science Institute ( email )

One University Dr.
Orange, CA 92866
United States
714-628-2830 (Phone)

Chapman University School of Law ( email )

One University Drive
Orange, CA 92866-1099
United States

Marca Weinberg

Department of Agriculture (USDA) - Economic Research Service (ERS) - Market & Trade Economics Division ( email )

Washington, DC
United States
694-5478 x400 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
165
Abstract Views
1,662
rank
178,169
PlumX Metrics