Formal and Informal Markets for Water: Institutions, Performance, and Constraints

Water markets—either formal or informal—can be anefficient method for reallocating scarce water supplies. Atthe same time certain constraints can raise the transactioncosts of trading water. This paper reviews the conditions necessaryto establish successful water markets, identifies potentialproblems, and offers mitigating strategies. It also uses examplesof several informal and formal water markets already in operationto illustrate these problems and the solutions to them.      

The economic and financial gains from water markets in Chile

Chile is one of the few countries that has encouraged the use of markets in water resource management. In order to assess the impact of water markets and transactions costs in Chile, four river valleys, the Maipo, Elqui, Limarí, and the Azapa were selected as case studies. Transactions from the Elqui and Limarí valleys, during the years 1986 to 1993, were analyzed to determine the gains-from-trade from market transfers. In the economic and financial analysis of water markets, crop budgets were used to estimate the value of water in agricultural production. The value of water-use rights to urban water-supply companies was estimated using the avoided cost of an alternative investment in a water-storage reservoir. The analysis demonstrated that the market transfer of water-use rights does produce substantial economic gains-from-trade in both the Elqui and Limarí Valleys. These economic gains produce rents for both buyers and sellers. But buyers, especially farmers growing profitable crops who buy water-use rights and individuals buying water-use rights for potable water supply, receive higher rents then sellers. Large table-grape producers in the Limarí Valley and individuals buying water for human consumption in the Elqui Valley received the highest rents. In the Elqui Valley net gains-from-trade per share were within the range of recent transfer prices of US$1000. In the Limarí Valley, gains-from-trade per share are 3.4 times the recent prices of US$3000 for a share of water from the Cogotí Reservoir. Where trading was active, especially in the Limarí Valley, transactions costs have not presented an appreciable barrier to trading. Nonetheless, in the large canal systems with fixed flow dividers in the Elqui and Maipo Valley there have been very few transactions. Various factors contribute to the lack of trading, but the absence of trading in these large canal systems highlights the costs of modifying fixed infrastructure, especially for trades between farmers.     

SUPPLY RESPONSE WITH STOCHASTIC TECHNOLOGY AND PRICES IN AUSTRALIA'S RURAL EXPORT INDUSTRIES

Risky output prices and production characterise Australian agriculture. Exports are vitally important, sometimes relying heavily on a particular market. In this study a model is developed to include explicitly both output price and technological risks as well as multiple output relationships. It is used to show that changes in US beef import policy generating a 10 per cent beef price fall could reduce Australian beef supply by 3.5 per cent and grazing industry net revenue by 8.4 per cent, despite some switching from beef production to other enterprises.     

Asia's Irrigation Management in Transition: A Paradigm Shift Faces High Transaction Costs

Many water management problems have arisen in past Asian irrigation projects. They have been characterized as a vicious cycle involving the lack of maintenance, poor irrigation service, low rates of fee collection, inadequate institutional arrangements, and lack of user participation. This article argues that we have generally agreed on a strategy to address these problems and asks whether or not the strategy is being implemented effectively. A review of the irrigation record of six countries in Asia (including India and China) shows that they have implemented several of the key irrigation management reforms but that high transaction costs have delayed reform.     

Do Farmers Overuse Nitrogen Fertilizer to the Detriment of the Environment?

Increasing use of nitrogen fertilizer in U.S. agriculture has led to nitrate contamination of water resources. The main objective of the study is to determine if the current use of nitrogen exceeds the profit-maximizing level, since reducing such discrepancy, if any, could raise farmers' profitability and enhance water quality making it a win-win situation. Specific objectives of the study, however, are two-fold. First, develop an appropriate methodology for estimation of an agronomic production function utilizing panel data with several treatments from experimental plots. Second, using experimental data from 1987 through 1990 for three farm sites in southeastern Minnesota, empirically estimate the production function and profit maximizing level of nitrogen application. Our results show that both the current recommended rate, 150 1b/acre, and farmers' use, 176 1b/acre, of nitrogen exceed the profit maximizing level of nitrogen in the region. It is shown that the recommended rate needs to be revised and made more site or area specific rather than a general figure for the entire region. The study shows considerable residual nitrogen build-up in the soil profile, implying that farmers have been applying more nitrogen than could be utilized by corn plants. The later finding highlights the importance of soil testing for plant nutrients when making decisions on fertilizer application.