Recovering water for the environment during droughts through public water banks within a monopsony-monopoly setting

Abstract

Allocation trade is an instrument that has been widely used to recover water for the environment during periods of scarcity (droughts). This paper proposes a water bank operating within a monopsony-monopoly setting with the dual purpose of reallocating water among farmers and acquiring water for the environment during drought periods. The proposed water bank would be managed by a public agency seeking to maximize economic efficiency generated in purchases and sales of water for agriculture and the efficiency generated by the recovery of water allocations for the environment. An additional, innovative feature of the analysis performed is that it considers the inefficiencies in the economy as a whole caused by public spending on water allocation purchases, measured through the marginal cost of public funds. The potential performance of the proposed water bank is simulated by mathematical programming techniques, taking the Guadalquivir River Basin (Southern Spain) as an empirical case study. The results provide evidence that, in terms of economic efficiency, the proposed institutional arrangement outperforms the instruments currently in place to purchase water allocations.