Water property rights in rivers with large environmental water holders
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PhD Seminar (Econ)
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This paper considers the design of water property rights in river systems — such as the Australian Murray-Darling Basin (MDB) — where large Environmental Water Holders (EWHs) are active. In particular, it considers the definition of rights to dam storage capacity and to physical river flows. We present a decentralised model of a regulated river system involving a large number of consumptive water users (i.e., farmers) and a single large EWH. These entities each make private water storage and trade decisions, subject to the prevailing property right rules, so as to maximise their own objectives (i.e., farm profits or environmental benefits). We specify broad parameter ranges — reflective of rivers in the MDB — and present the results of a large number of model runs. We find the ideal approach to storage rights is the ‘capacity sharing’ model advocated by Dudley and Musgrave (1988). In contrast, poorly specified storage rights can lead to large external effects on consumptive users. Further, we find that priority flow rights outperform simple proportional flow rights. Low priority water rights are found to be a good match for the demands of EWHs, helping to minimise their exposure to market transaction costs.
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