Droughts, Deluges, and (River) Diversions: Valuing Market-Based Water Reallocation
American Economic Review
vol. 113,
no. 2, February 2023
(pp. 430-71)
Abstract
This paper develops and applies a method to value water trading on a river network. The framework relies on regulatory variation in diversion caps to identify production functions for irrigated farms, then uses the estimated shadow values to assess the market's reallocation. I apply this framework to the largest water market in human history, located in southeastern Australia. Observed water trading increased output by 4–6 percent from 2007 to 2015, equivalent to avoiding an 8–12 percent uniform decline in water resources. Reallocation and average surplus both increase substantially during drought, implying that water markets can be most valuable when climatic variability is most severe.Citation
Rafey, Will. 2023. "Droughts, Deluges, and (River) Diversions: Valuing Market-Based Water Reallocation." American Economic Review, 113 (2): 430-71. DOI: 10.1257/aer.20201434Additional Materials
JEL Classification
- D23 Organizational Behavior; Transaction Costs; Property Rights
- D24 Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- Q12 Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
- Q15 Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
- Q25 Renewable Resources and Conservation: Water
- Q54 Climate; Natural Disasters and Their Management; Global Warming