Transaction costs, modes, and scales from agricultural to industrialwater rights trading in an Inland River Basin, Northwest China

Abstract

Water transactions from agriculture to industry have become an important means to address water scarcity and improve water economic efficiency. Transaction costs (TCs) are one of the main factors preventing water markets from forming or efficiently operating. To evaluate the level of transactions costs, we set the appropriate transaction modes for cross-sector lever water trading and evaluated the TCs from agriculture to industry in the Heihe River Basin (HRB), an inland basin in northwest China. We found that the ranges of transaction costs per m3 of water ranged from 0.06 to 1.10 yuan, and the ratios of TCs to transaction prices ranged from 4.11% to 244.44%. The transaction scale should be more than 15,267 m3 or 29,888 m3 when the TC is at the lower or upper limit in the study area. When the transaction scales are set correctly, the range of the transaction costs will be in an acceptable range, and the proportion of TCs to transaction price will not exceed the 8% limit of the California Water Bank, which was employed as a comparison. The key restrictive factor of water trading in HRB may be the low transaction scale, followed by the high water TCs. The effects of improving water use efficiency in cross-sector trading could not neutralize the restrictions caused by the negative effects of small water demand transaction scales for undeveloped secondary industries in HRB. However, considering the industrial structure and development trends of the regional economy, the future driving force of water transactions across sectors likely lies in tertiary industries in HRB.