Law Commons^™

Incorporating Instream Flow Values Into A Water Market, Vernon Smith, James Murphy, Ariel Dinar, Richard Howitt, Stephen Rassenti, Marca Weinberg

Vernon L. Smith

We use laboratory experiments to test three different water market institutions designed to incorporate instream flow values into the allocation. The institutions are (1) a baseline with fixed minimum flow constraints, (2) an environmental agent contributing to the cost of providing instream flows, and (3) creating an instream flow right in which an environmental agent can sell the right to reduced flows. Using a "smart" computer-coordinated market, we find that direct environmental participation in the market can achieve highly efficient and stable allocations. A particularly attractive and practical feature of the third institution is that it nests the status quo …