Water Permit Trading for reservoir water under competing demands and downstream flows

Abstract

The design of effective market institutions for allocation of water among competing uses remains an economic challenge both at a theoretical and practical level. The public good characteristic of instream flows adds another layer of externality which complicates transfers between consumptive and environmental water users, leading to the slow evolution of this market in many parts of the world including western United States. Utilizing a unique case study of reservoir management in northeast Oklahoma, this research explicitly ties the third-party impacts of binding stream flow constraints with the opportunity costs of water transfers, paving the way for a centralized market mechanism for water transfers among consumptive and nonconsumptive users over time. The study aims to enhance the evolving research around environmental water markets and offer a possible solution to a long-standing debate among local stakeholders on a suitable allocation of water for environmental purposes.