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Water Markets for the 21st Century pp 11–34Cite as

Transaction Costs and Policy Design for Water Markets

Part of the Global Issues in Water Policy book series (GLOB,volume 11)

Abstract

This chapter synthesizes the growing empirical literature on transaction costs to identify pragmatic design recommendations for water markets and related institutions. The New Institutional Economics literature recognizes that appropriate policy choice and design will be a function of the specific characteristics of the problem. The physical and institutional determinants of both transaction costs and transformation costs should be considered in the design of water markets due to potential interactions between them. Analysts also need to incorporate the extent to which the technologies, institutional environment, governance structures, or policy designs can be changed; some factors can only be adjusted to or “designed around” while others can be designed differently. This framework highlights the importance of property rights, historic water use patterns, and path dependency since transaction costs will be incurred to obtain or retain property rights to water. The physical complexity associated with water resources increases transformation costs as well as transaction costs. Uncertainty and changing societal preferences highlight the importance of flexibility and conflict resolution mechanisms in institutional design. Sequencing of policy changes is also revealed as a key design consideration.

Keywords

  • Institutions
  • Policy design
  • Property rights
  • Transaction costs
  • Water markets

Portions of this chapter have previously appeared in McCann (2013) and are used with permission of Elsevier. Partial funding from USDA-NIFA Multistate Project W2190 is gratefully acknowledged.

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Fig. 2.1

Notes

  1. 1.

    The definition of transaction costs used in this paper is that of Marshall (2013) “Transaction costs are the costs of the resources used to (i) define, establish, maintain, use and change institutions and organizations, and (ii) define the problems that these institutions and organizations are intended to solve.” This definition expands on the definition in McCann et al. (2005) and thus is broad enough to examine the institutional environment (North 1990).

  2. 2.

    This chapter’s framework takes the benefits of reallocation as given although the optimal amount of change will depend on both costs and benefits, both of which may change due to preferences and technical change. Nevertheless, in some cases the amount of change needed to solve a problem is a function of physical and biological factors.

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Authors and Affiliations

  1. Department of Agricultural and Applied Economics, University of Missouri, 212 Mumford Hall, Columbia, MO, 65211-6200, USA

    Laura McCann

  2. Department of Political Science, McMaster University, 1280 Main Street West, Kenneth Taylor Hall Room 534, Hamilton, ON, L8S 4 M4, Canada

    Dustin Garrick

  3. Walter G. Booth School of Engineering Practice, McMaster University, Hamilton, ON, L8S 4 M4, Canada

    Dustin Garrick

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  1. Laura McCann
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Correspondence to Laura McCann .

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Editors and Affiliations

  1. University of Minnesota Dept. Applied Economics, St. Paul, Minnesota, USA

    K. William Easter

  2. Department of Agricultural Economics and Agribusiness, University of Arkansas, Fayetteville, Arkansas, USA

    Qiuqiong Huang

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McCann, L., Garrick, D. (2014). Transaction Costs and Policy Design for Water Markets. In: Easter, K., Huang, Q. (eds) Water Markets for the 21st Century. Global Issues in Water Policy, vol 11. Springer, Dordrecht. https://doi.org/10.1007/978-94-017-9081-9_2

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