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European Review of Agricultural Economics 2005 32(2):119-142; doi:10.1093/eurrag/jbi006
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© Oxford University Press and Foundation for the European Review of Agricultural Economics 2005; all rights reserved. For permissions, please email: journals.permissions{at}oupjournals.org

Modelling water markets under uncertain water supply

Javier Calatrava

Universidad Politécnica de Cartagena, Cartagena, Spain

Alberto Garrido

Universidad Politécnica de Madrid, Madrid, Spain

Corresponding author: Javier Calatrava Levya, Departamento de Economía de la Empresa, Universidad Politécnica de Cartagena, E.T.S.I.A., Paseo Alfonso XIII n°48, 30203 Cartagena, Spain. Email: j.calatrava{at}upct.es

Received July 2004; Revision received March 2005.

Summary

This paper looks at the risk dimension of water markets under uncertain water supply. We model market participants' decisions under uncertainty and evaluate gains from trade under two different market arrangements. These differ in the confidence that irrigators can place in the water market-clearing processes, and their chances of pursuing tactical responses to deal with supply uncertainty. A two-stage stochastic model, that simulates both market arrangements, is applied to an irrigation district of Southern Spain. We show that centralised water markets, perhaps brokered by the water authority, lead to more efficient allocation and resource use than decentralised markets. The paper highlights the importance of providing a reliable market setting.

Keywords: water markets, uncertainty, water supply, farm modelling, Q25, Q12, D81


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