The Water Markets as Effective Tools of Managing Water Shortages in an Irrigation District

In this work, the efficiency of water markets in an irrigation district is put under consideration. This efficiency is referred to the private economic losses arising from a reduction in the availability of water, so the most efficient or optimal allocation will be the one that minimizes these losses or the one that provides the maximum private benefit. On this view, the optimal allocation has been studied in an irrigation community, and it has been compared with the rule of fixing a same quota and the proportional reduction. Besides, from the water allocation made by these last two rules, a water market has been simulated. Formulation for all of them is provided. Results show that water markets will improve the suboptimal allocation made by the rule of fixing a same quota and the proportional rule, even when transaction costs are high. They also show that, mostly, the greater the water restrictions, the greater are the gains from trade. It can be inferred too that, as long as all determinants have been taken into account and transaction costs are low enough, the aggregate losses of income ensuing from any prescribed water reduction will be the lowest both by means of the optimal allocation as with a market. Anyhow, results and conclusions clearly dependent on the relations made between allocations and crop yields.