Modeling Imperfectly Competitive Water Markets in the Western U.S.

Water is an essential ingredient to growing communities, healthy ecosystems and vibrant industries. Due to increases in population in the western U.S., the gap between forecasted water demands and available water supplies is growing. One of the primary means by which increased demand for water will be met is through voluntary water transfers. Market based, voluntary transfers of water have long been promoted by economists based on the idea that, under perfectly competitive market conditions, they lead to an efficient allocation of water. In this paper, we explore the function of water markets when perfectly competitive conditions do not exist, answering the question, how does the presence of transaction costs in water markets impact welfare outcomes, in terms of overall efficiency and distributional impacts? As a secondary research question, this paper explores how different buyers and sellers are differentially affected by transaction costs, and thus, any policy measures to reduce such costs. Results from this paper show that heterogeneous agents and the existence of transaction costs do play a role in welfare outcomes from the water market, showing the importance of modeling imperfectly competitive water market to provide more nuanced policy and market analysis