How Might Future Water Markets Look: The Use of Experimental Economics to Design Markets for Water
نویسندگان
چکیده
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. Experimental economics yields a formal and replicable system for analyzing alternative market structures, such as the ‘smart’ market, before they are actually implemented. For example, a ‘smart’ water market can be developed and tested in the laboratory during years of sufficient water to simulate drought conditions. In this paper, we discuss the role that experimental economics can play in evaluating proposed institutional changes to help facilitate a more rapid and smooth adoption of changes in the water system, and demonstrate it using a set of experiment under California conditions. A prototype of the California water transfer model and results from its testing in the laboratory, using trained student subjects, is presented. Results include levels of price efficiency achieved by the smart market players compared with a hypothetical set of perfectly competitive trades, and the rate of price discovery by the players. The experiments also address variability in supply of water and assignment of water transport rights as an institution for improved efficiency. Results suggest that cotenancy yields more stable and lower prices, and that predicted water supply cycles allow the traders to converge to a more-or-less stable pattern of water use. The paper concludes that establishment of water networks using a computer coordinated smart allocation mechanism will yield substantially competitive outcomes even in relatively thin markets such as the one experimented in the paper. INTRODUCTION Farmer Melcolm Ortega turned off his computer. It was late, and he just finished running a simulation of his cotton farm, located at the southern part of the Morgen Valley in the State of
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