Privatization of Water-Resource Development

UNCG Author/Contributor (non-UNCG co-authors, if there are any, appear on document)
Stephen P. Holland, Associate Professor (Creator)
The University of North Carolina at Greensboro (UNCG )
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Abstract: This paper analyzes the inefficiencies from market power and return-flow externalities in private construction of a water project. The model pays special attention to increasing groundwater pumping costs, project set-up costs, limited project capacity, and return flow to the aquifer. For a given capacity, the return-flow externality causes project owners to construct the project too late when the price of groundwater is too high because the external benefit of return-flow to the aquifer is not captured. Market power exacerbates these effects since the project owner delays construction to accelerate groundwater overdraft. The return-flow externality and market power also decrease installed capacity and increase over-draft from the aquifer. Applying the model to the construction of the Central Arizona Project (CAP) for a given capacity, the estimated deadweight loss from hypothetical private construction of the project ($0.853 billion) is substantially less than the literature‘s estimate of deadweight loss from actual construction by the Bureau of Reclamation ($2.603 billion). However, under the federal subsidies and insecure property rights that accompanied the CAP, private construction results in a larger estimated efficiency loss ($6.126 billion).

Additional Information

Environmental and Resource Economics (2006) 34(2): 291-315.
Language: English
Date: 2006
Central Arizona Project, groundwater, optimal control, privatization, return flow, surface water, water, water project construction

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