Agricultural Groundwater Markets: Understanding the Impacts of Market Power on the Gains from Trade

• Agricultural Economics Workshop

Date and Location

Thursday, November 16, 2017, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

This paper models and quantifies the efficiency gains from using market-based instruments relative to command and control to manage groundwater. A theoretical model of a groundwater market is developed to show how the magnitude and distribution of the gains from trade change as market structure varies. Market structure is a key consideration because the presence of large grower-shippers and/or competition among a few water agencies on a shared basin may be defining components of future groundwater markets. Using data from a groundwater basin in southern California, this paper demonstrates the existence of large gains from trade, despite the potential for market power. Importantly, the price elasticity parameter used to calibrate the model is generated with a fixed-effects econometric model that utilizes well-level panel data on groundwater extraction and exploits temporal and cross-sectional variation in extraction prices. Simulations that vary market conditions show that results generalize to other groundwater basins.