Water market and water property rights

When water market data are available, economists rely on observed prices and market transactions to infer the value of a particular good for analyses of policy impacts. Com-monly, the demand curve – as the basis of quantitative economic analyses – is determined through econometric curve fitting techniques using field data. This ‘direct’ approach is difficult in the analysis of water demand in agriculture. The price of water is only rarely determined in the market (Fraiture and Perry,2007, p.95). The water market availability depends on the structure of water property rights for and water entitlements to the use of groundwater and surface water. As the focus of this paper is groundwater, the private property rights concerning groundwater will be discussed below.

Three categories of policy instruments are typically distinguished for groundwater man-agement and governance: regulatory or command and control, economic policy, and volun-tary / advisory / participatory (Theesfeld,2010;Shah et al.,2008). Direct administrative regulation involves laws or executive orders requiring the issue of licences/permits, pre-scribing the volume of groundwater the permit holder is entitled to extract, or specifying norms for the distance to be maintained between existing and new wells. Economic in-struments include charges and taxes levied on irrigation wells or the volume of water withdrawn. Tradable water rights for groundwater as an economic instrument have been tried in the western United States and in Chile. By making these rights tradable, some countries have tried to create markets for water rights. Participatory aquifer manage-ment by groundwater communities is based on the western United States experience with groundwater districts (Shah et al., 2008, p.3).

Allowing for trade in water entitlements along the watercourse is a market mechanism that could, in principle, increase productivity although it may exert a negative influence on the traditional and accepted systems (Hellegers et al.,2007, p.203). The private property right regime includes the right to divide a property rights into access rights, withdrawal rights, management rights, exclusion rights, and alienation rights (Schlager and Ostrom, 1992, p.250-251) which is difficult to be defined for water generally and groundwater specifically. The mobility of water and the opportunity for sequential use and re-use make water relatively distinctive as a commodity (compare to land for instance). Keeping

track of water flows is costly and sometimes difficult. Consequently, it is often hard or impractical to enforce excludability or to establish property rights to return flows. In this respect, water is very different as an asset than land, which is relatively easy to divide and fence. The common solution is to resort to some form of collective right of access; in effect, this internalizes the externality associated with the mobility of return flows (Hanemann, 2006, p.72).

Based on Provencher and Burt (1994, p.876), private property rights could be im-plemented by granting firms an initial endowment of tradeable permits to the in situ groundwater stock, which they control over time. Each year, a firm’s consumption of groundwater is constrained by its endowment of permits, which it can adjust by buying or selling permits. Moreover, the number of permits held by the firm is decreased annually to reflect the firm’s entitlement to natural recharge of the aquifer. The firm’s claim on the groundwater stock does not necessarily equal the stock of groundwater beneath its land. The allocation of the water resource over time is in this setting achieved by the market for groundwater stock permits, and does not require direct demand management by a regulator. The role of the regulator is confined to choosing the initial allocation of groundwater stock permits, developing the rule for the annual allocation of natural recharge, and enforcing that all users obey to the rules. However, the market mechanism might fall short of achieving full recovery of the potential gains the viewpoint of society at large. Provencher and Burt (1994) argue that the equilibrium price of permits fails to equal the marginal net social value of the in situ groundwater stock. They conclude that although the private property rights regime recovers a relatively large proportion of the potential gain from groundwater management, in absolute terms this gain is relatively small. In addition, poorly defined property rights for the access to the water reservoirs can even lead to increased inefficiency in the resource management by establishment of water markets (Brennan,2008). Even if the rights in a water market are well defined, price dis-persion and price discrimination can be recognized inside the water markets (Yoskowitz, 2002).

One particular problem with market based coordination mechanisms is related to the fact that in some countries market systems are largely ineffective due to corruption

(Theesfeld, 2010, p.135). The impacts of corruption are often more extreme in devel-oping countries, although the phenomenon is not limited to low or lower middle-income countries (Plummer, 2008, p.3). Corruption can be found in a range of interactions at all levels and in all aspects of the water sector, but it also affects the allocation between different uses and users. One type of corruption is when public servants abuse their power to extract small bribes, such as a water meter reader who offers to reduce a customer’s bill in return for payment (Plummer, 2008, p.6). Once the market system is distorted, economic policy measures are unlikely to be effective (Theesfeld, 2010, p.135)¹.

In typical water markets, the transaction frequency among water users is low (Young, 1986; Donohew, 2009, p.102). Hence, analysing available water markets and the WTP and price for water are particularly useful practices to define factors affecting water de-mand and for improving non-market valuation methods. The shortages of the available data for the price analysis of formal and informal water markets is an issue of concern.

Mukherji(2008, p.1086) has advised national survey programs in India to gather data on irrigation service hiring and groundwater markets information, such as the prices paid for buying water or renting pumping equipment.

In this paper, we have focused on the factors which affect the WTP for irrigation from depleting groundwater resources of the Rafsanjan aquifer in Southeastern part of Iran during the agricultural year of 2007-2008. In Iran, the Law of the Fair Distribution of Water (Majlis of Iran,1983) regulates water using by the common property rights. Under this law, citizen receive legal permission to use groundwater, which is a public good.

However, these permits are a form of property ownership and have very high shadow values, according to water charge levels of wells and water quality, although there is a restriction of this law which can operate against any water market expansion. Paragraph 28 of this law forbids any use of water which is not stated in the given permits. Moreover, the water use permits should be administered under the supervision of the Ministry of

1Moreover, there are two different views on the equity and fairness issues of informal water markets.

One group of scholars, such asSharma and Sharma(2006, p.53), claims that the price of the informal water market is not fair and water sellers heavily charge the smallholders and farmers who are on the margin. However, there are other views which hold that informal groundwater markets have been crucial in alleviating rural poverty (Fujita and Hossain,1995).

Energy (MOE) and, in the case of buying and selling land, new landholders are required to follow the original permit stipulations. In spite of this law, water trade among water users has been recognised mostly among smallholders of this aquifer.

The price that is paid for an extra unit of irrigation water reflects the WTP of farmer.

Analysing this WTP give us the chance to find the right value of water. But caution has to be given as not all of the farmers are participated in the spot water market. The fact that 2 distinct groups of participants and nonparticipants are available, motivate a WTP study by considering the self selection of the participants. The existing water valuation literature is largely ignorant on self-selectivity issues. Self selectivity is an issue which we have recognized in this spot water market and as a contribution, the factors affecting the WTP has been analysed by the Heckman sample selection model with emphasis on the effects of the farmers’ decisions to participate in the spot water market. The price which is paid by the farmers is considered as the WTP in this research. In the following section (4.2), the existing literature in this field is selectively reviewed. Subsequently, in section 4.3 the Heckman sample selection model for analysing WTP is developed and adapted to our context. Finally, the results are presented and discussed.