Groundwater extraction can have varied and diffuse effects. Negative external effects may include costs imposed on other groundwater users and on surrounding ecosystems. Environmental damages are commonly not reflected in market transactions. Groundwater transfers have the potential to cause spatial redistribution, concentration, and qualitative transformation of the impacts from pumping. An economically and environmentally sound groundwater transfer scheme would ensure that marginal costs from trades do not exceed marginal benefits, accounting for all third-party impacts, including those of a non-monetary nature as well as delayed effects. This paper proposes a menu of possible management strategies that would help preclude unacceptable impacts by restricting transfers with certain attributes, ideally ensuring that permitted transfers are at least welfare-neutral. Management tools would require that transfers limit or reduce environmental impacts, and provide for the compensation of financial impacts. Three management tools are described. While these tools can limit impacts from a given level of extraction, they cannot substitute for sustainable overall withdrawal limits. Careful implementation of transfer limits and exchange rates, and the strategic use of management area boundaries, may enable a transfer system to restrict negative externalities mainly to monetary costs. Provision for compensation of these costs could be built in to the system.


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