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- Title
The design of 'smart' water market institutions using laboratory experiments
- Authors
Smith, Vernon L.; Murphy, James J.; Rassenti, Steven J.; Dinar, Ariel; Howitt, Richard E.
- Abstract
One of the problems with proposals for substantial institutional change in water systems is that modification and irreversibility make the process slow, cautious and costly to society. In this paper, we discuss the role that experimental economics can play in evaluating proposed institutional changes to help facilitate a more rapid and smoothadoption of changes in the water system. Experimental economics yields a formal and replicable system for analyzing alternative market structures before they are actually implemented. For example, a water market can be developed and tested in the laboratory under supply and demand constraints that reflect drought conditions that might occur in California, or other arid regions in the world. We present a prototype of a California water transfer model and the results from a series of water market experiments. Results include realized market efficiency and surplus distribution, as well as an analysis of market pricevolatility. The implications of this research extend well beyond California water markets, not only to water markets in other arid regions, but also to the design of markets for other environmental goods, including tradable pollution permits and fishery ITQs.
- Subjects
CALIFORNIA; UNITED States; ECONOMICS; HYDROLOGY; MATHEMATICAL analysis; WATER supply
- Publication
Environmental & Resource Economics, 2000, Vol 17, Issue 4, p375
- ISSN
0924-6460
- Publication type
Article