Introduction to special section on Water Markets and Banking: Institutional Evolution and Empirical Perspectives

[1] This special section on Water Markets and Banking: Institutional Evolution and Empirical Perspectives presents various economic approaches and legal and institutional discussions to better understand the issues surrounding the allocation of water. The interest in water markets and water banking stems from the growing recognition that demand for water is outstripping its availability worldwide. Novel and innovative adaptation strategies for decision making are needed to address increasing scarcity in the face of climate change, drought, and continuing population growth. One set of adaptive strategies being explored consists of markettype allocation institutions, but how do we design these institutions within the variety of legal settings that exist around the world and how well do alternative market structures and arrangements function? The first three papers in this special section present case studies using alternative economic methodologies to understand the operation of water marketing and banking in Australia, the United States, and South Africa. Other authors present an analysis of prices observed for water trades in the southwest region of the United States to explore how market prices convey information about the operation of the institution itself. By looking at the experience in the Chilean water markets, another paper focuses not on the history of prices but on a wide-ranging and qualitative assessment of the success of the market institution. In another paper we are presented with a comparison of formal and informal water markets in Australia. Finally, two papers address legal and institutional issues in the design of water market allocation institutions. [2] Water is scarce worldwide. This scarcity is driven by increasing world populations, cyclical drought, climate change, and rigid institutional allocation structures. It is made worse by inflexible, but historically stable, institutional structures used to allocate water. An alternative, and more flexible, set of structures can be broadly called water markets and water banks. The literature is casual in the definition of the distinctions of marketing and banking. One may think of banking as being the temporal anchored trade by some allocation mechanism and water marketing as the formal change in perpetual ownership. Both ‘‘marketing’’ and ‘‘banking’’ involve some type of exchange process between willing traders. Both markets and banks allow for the transfer of water usage, and reflect the value of the water between uses. It is because of these features that the interest in these allocation mechanisms has grown recently. Numerous authors (who are cited in the various papers in this special section) have constructed the theoretical arguments that some type of market based trading mechanism would greatly increase the efficient use of water. The basic argument is well established: water is a natural resource with varying value in different uses and within clearly defined social and political constraints, should be encouraged to move to its highest valued use. [3] Much of the early empirical work regarding water markets was focused on describing their nature and documenting the observed trades, for example, by counting the number of water trades or exchanges in a basin. More recently, some countries and smaller political jurisdictions have redefined the institutional structures for water allocation. This has hastened the need to understand beyond theoretical considerations how well these alternative institutions perform from an empirical standpoint and what are some of the institutional design issues that remain. The specific goal of this special section is to further this process of understanding the operation of and challenges faced by water allocation institutions around the world. [4] There are eight papers in this special section. By employing different methodologies, all widely used in economics, applied to various countries around the world, the researchers present a wide-ranging analysis of the social, political, legal, and economic institutions that manage, administer, allocate, and adjudicate water between competing uses. Yet there emerges a common thread that places the efficient market model as the appropriate reference standard by which we can judge the performance of these institutional arrangements and suggest improvements. [5] Burke et al. [2004] develop an integrated approach for water banking on the Klamath Project in south central Oregon, United States. The region is the center of an ongoing controversy that brings to the fore the increasing demand for water to restore habitat and protect endangered species. As water is shifting between uses, one outcome has been decreased water availability for traditional uses. Their approach integrates hydrologic and economic aspects, focuses on irrigators, and estimates an underlying supply curve for water. They find supply to be relatively price elastic (flat), which implies that relatively small increases in water prices brings forth quite large quantities of water for sale. In this situation, Burke et al. explore alternative market formulations for use by the U.S. Bureau of Reclamation to make price a more effective tool for allocating smaller quantities of water at the margin. They conclude that while Copyright 2004 by the American Geophysical Union. 0043-1397/04/2004WR003394$09.00