On the Effectiveness and Implementability of Water Rights Buy-Back Schemes

This paper offers a theoretical framework to analyze the implementability and performance of water rights buy-back schemes. On prediction of the model is that the success of the buy-back mechanism crucially depends on the effectiveness of the monitoring regime. When this is limited the implementation of the policy does not induce any substantial change in water consumption, and simply translates in a monetary transfer to farmers endowed with water rights. The analysis provides a theoretical support for the existing findings in the case study literature. While the previous result states that a functional monitoring system is a necessary condition for the success of the buy-back policy, the paper also shows that the degree of monitoring affects the cost of implementing the policy: as the monitoring regime becomes more powerful, the minimum price at which the policy can achieve a certain reduction in water consumption increases. In other words, the policy becomes more costly to implement and its objectives more difficult to achieve. This 'trade-off' needs to be carefully considered by governmental authorities when designing the optimal policy.