Inter-basin water transfers under uncertainty: Storage capacity and optimal guaranteed deliveries

This paper deals with water transfers between jurisdictions not claiming riparian rights to the same water source, and taking place through straightforward sales. Taking into account the uncertain nature of water surpluses, we investigate, within a partial equilibrium framework, the implications of a third party's provision of storing facilities upon the potential supplier's decision whether, and to what extent, it is worthwhile to guarantee a constant amount of water exports. The analysis suggests that there exists a minimum storage capacity below which the potential supplier will never find it profitable to divert a constant amount of water outside his boundaries; the greater the uncertainty about future surpluses and/or internal costs due to even occasional water shortages resulting from the water export commitment, the higher the required minimum storage capacity will be. Above this minimum, an increase in the capacity would be better for the surplus agent, but in a situation in which water surplus is expected to decrease over time, increases in storage capacity would make him willing to guarantee a smaller amount of water deliveries.This work has been carried out under the auspices of the European Science Foundation's research program Sharing fresh water resources in the Mediterranean region: An economic perspective. Previous versions have been presented at ESF workshops held at the Universities of Haifa, Padova and Crete. Financial support from MURST (funds 40% — 1992) is gratefully acknowledged. We wish to thank Nunzio Cappuccio, Haluk Akdogan, Karl Mäler, Mordechai Shechter, Naomi Zeitouni, and two anonimous referees for helpful comments. The usual disclaimer applies.