SEMINAR: Agricultural Groundwater Markets: An Analysis of the Gains from Trade and the Role of Market Power

Abstract: Groundwater is becoming a more widely regulated resource, yet the impacts of groundwater markets are not well understood. With an application to a groundwater basin in southern California, I develop a theoretical and simulation model of groundwater trading to estimate the gains from allowing trade. Within this framework, I show how the gains from trade change as market conditions and market structure vary. Market structure will be a key factor to consider when evaluating groundwater markets. If a handful of buyers or sellers control most of the permits, market power in permit trading would decrease the gains from trade. Since many water agencies restrict the export of groundwater outside basin boundaries, future groundwater markets will likely be spatially isolated. Market power may be a defining component of these local groundwater markets due to the presence of large grower-shippers and/or competition among a few water agencies on a shared basin. Simulation results based on linear groundwater demand curves show that gains from markets are large, despite potential losses from market power.