Promoting Competitive Water Resource Use Efficiency at the Water-Market Scale: An Intercooperative Demand Equilibrium-Based Approach to Water Trading

Abstract

Water rights law and corresponding markets exist to promote economic water resource use efficiency by permitting water rights holders to trade allocations. In some regions, hydrologic uncertainty drives annual assignment of per-water right allocation values. Water rights holders, specifically those involved in agricultural production, may use collaborative water resource decision making to mitigate allocation uncertainty and promote economic and social efficiency. Such is the case in semi-arid North Chile, where interactions between representative farmer groups, treated as resource competitive growers’ cooperatives, and modeled at water market-scale, can provide both price and water right allocation distribution signals for unregulated, temporary water right markets. For the range of feasible per-water right allocation values, a coupled agricultural-economic model is developed to describe the equilibrium distribution of water, the corresponding market price of water rights, and the net surplus generated by collaboration between competing agricultural uses. A static, demand-based allocation redistribution ruleset is generated by which the cooperatives are constrained to abide. Water right supply and demand inequality impacts at the market-scale are used to characterize market performance under existing water rights law, and to evaluate the efficacy of intercooperative collaboration over the period 2000–2015. Exclusive intercooperative water trading, following a demand-based ruleset, produces joint mean annual expected profits 24%–122% larger than a case of no-interaction, depending on initial rights distribution. The broader insights of this research suggest that water rights holders engaged in agriculture can achieve enhanced benefits by forming crop-type cooperatives and implementing demand-based allocation redistribution rulesets.