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Market Design for Surface Water

Many proposed surface water transfers undergo a series of regulatory reviews designed to mitigate hydrological and economic externalities. While these reviews help limit externalities, they impose substantial transaction costs that also limit trade. To promote a well-functioning market for surface water in California, we describe how a new kind of water right and related regulatory practices can balance the trade-off between externalities and transaction costs, and how a Water Incentive Auction can incentivize a sufficient number of current rights holders to swap their old rights for the new ones. The Water Incentive Auction adapts lessons learned from the US government’s successful Broadcast Incentive Auction.

Billy A. Ferguson
Paul Milgrom
Publication Date
December, 2023