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Efficiency Gains From Transferable Water Rights, Joseph Ziska

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In times of drought, mandatory water restrictions are a popular option for local governments to prevent water shortages. The state of South Carolina has had mandatory water restrictions in various counties for nearly a third of the past decade. If there are heterogeneous consumers with varying marginal valuations for water, these mandatory restrictions may be economically inefficient. I calculate what welfare gains could be achieved for the state by allowing prices to fluctuate instead of imposing mandatory restrictions.
To perform this calculation, I assume a basic quadratic demand function for water with constant income elasticity. The water restrictions force all …