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Abstract
While there is potential for substantial benefits from water entitlement trade,
external effects such as salinity may mean that traders cannot capture these benefits.
This paper demonstrates that by creating a trading house as a single seller of water
entitlements, with trade profits distributed to buyers, it is possible to achieve an
allocation of entitlements which gives a social outcome higher than that possible
from atomistic competition for entitlements. Such an outcome may be comparable
to an optimally set uniform charge for water entitlements, but the trading house
mechanism has the advantage that it makes use of trade to generate information on
the optimal level of charging in the presence of salinity.