HR: 1340h
AN: SF33A-0726    [Abstracts]
TI: Toward an Agent-Based Model of Socially Optimal Water Rights Markets
AU: * Ehlen, M A
EM: maehlen@sandia.gov
AF: Sandia National Laboratories, PO Box 5800, Albuquerque, NM 87115 United States
AB: There has been considerable interest lately in using public markets for buying and selling the rights to local water usage. Such water rights markets, if designed correctly, should be socially optimal, that is, should sell rights at prices that reflect the true value of water in the region, taking into account that water rights buyers and sellers represent a disparate group of private industry, public authorities, and private users, each having different water needs and different priority to local government. Good market design, however, is hard. As was experienced in California short-run electric power markets, a market design that on paper looks reasonable but in practice is mal-constructed can have devastating effects: firms can learn to manipulate prices by `playing' both sides of the market, and sellers can under-provide so as to create exorbitant prices which buyers have no choice but to pay. Economic theory provides several frameworks for developing a good water rights market design; for example, the structure-conduct-performance paradigm (SCPP) suggests that, among other things, the number and types of buyers and sellers (structure), and transaction clearing rules and government policies (conduct) affect in very particular ways the prices and quantities (performance) in the market. In slow-moving or static markets, SCPP has been a useful predictor of market performance; in faster markets the market dynamics that endogenously develop over time are often too complex to predict with SCPP or other existing modeling techniques. New, more sophisticated combinations of modeling and simulation are needed. Toward developing a good (i.e., socially optimal) water rights market design that can take into account the dynamics inherent in the water sector, we are developing an agent-based model of water rights markets. The model serves two purposes: first, it provides an SCPP-based framework of water rights markets that takes into account the particular structure of buyers and sellers in water markets, reservation prices for water, the mechanics with which these buyers and sellers can participate in water rights markets, and the role of government authorities. Second it provides a virtual laboratory for studying the dynamic effects of different water market designs on the prices and quantities of water sold in the market. This design and laboratory work will help regional water authorities develop water rights markets that best reflect the needs of their regions.
DE: 6300 POLICY SCIENCES
DE: 6600 PUBLIC ISSUES
SC: Special Focus: Advances in Data Acquisition, Management, Analysis and Display [SF]
MN: 2004 AGU Fall Meeting