Study Of Third-party Effects Of Water Trading

With population growth and economic development, water resource has become more and more scarce and competitive. Water quantity reduction, water quality deterioration and water environmental degradation becomes a primary threat to the 21st century sustainable economic and social development. These water problems are solved around two basic ideas: one is to build more irrigation works to expand water supply; the other is to introduce market mechanisms to optimize water allocation and water utilization, thus to promote water saving. In practice, the first one meets more and more constraints such as huge costs and ecological conflicts, while establishing water markets is a more desired way to solve water shortage, which has been implemented in many water shortage areas around the world, and even a number of countries and regions use legislation to promote water market. Even so, water trading has not yet had large-scale development in water-shortage areas around the world, and has only made marginal contributions on the water shortage issue. This is because water trading also faces the problem of transaction costs. More importantly, it is because water trading has third-party effects.Water trading often gives priority to the interests of both the buyers and the sellers, whereas the third parties' interests are not fully reflected in the current water rights trading institution framework, that is to say third-party effects of water rights transactions are neglected. This dissertation focuses on the third party effects of water trading. Because water is a unique resource with important social, economic and ecological value, its transaction is different from the general commodity trading. The market can not completely and accurately reflect all the related values. The author of this paper considers that it is necessary to take the interests of third parties into account, and analyzes the efficiency and equity, the benefits and drawbacks of water trading. The issue of third party compensation is also discussed in this dissertation.This dissertation takes resources and environmental economics, property rights economics, new institutional economics, externality theory as the theoretical basis for research. It states that not all water rights transactions will have third-party effects, and provides five kinds of situations in which third-party effects of water trading may occur. It also studies the nature, the type and the causes of third-party effects, focusing on the positive effects negative effects of water trading. Based on the above analysis, this dissertation points out the existing structure of water property rights institution will generate the third-party effects, and analyzes the ongoing water trading and transfer practice in China, studies some cases of third-party effects, and gives some countermeasures to reduce the negative third-party effects.The conclusions of this dissertation are as follows: first, if the water rights trade is used as a major means of satisfying the newly added demand for water in water-shortage areas, it is necessary to balance the efficiency and equity of water rights transactions. The desired water rights transaction can not restrained, but the recognition and protection of the third parties interests are inevitable. Second, the establishment of water rights markets can solve the "market failure" due to the planned management for water resources. However, it does not mean water market does not need government intervention and restraint, especially when water trading has third-party effects, the government should provide some institutional arrangements to protect the third parties' interests who do not take part in the water trading process. Third, water policy should reduce the extra constraints and costs, at the same time it should include the important interests involved in the current water rights transaction. Although this may increase the transaction costs of water trading, the cost will be proved to be reasonable by its greater public satisfaction and wider public interests eventually brought. Fourthly, water trading and transfer should coordinate the affecting third-party interests. It is necessary to create formal and informal constraints that take all stakeholders involved into account. Government intervention is inevitable to compensate the victims of the third party. The water trading process should be assessed. Fifth, the buyers' and sellers' interests of water trading should not the focus of government policy. On the contrary, government policies should be concerned with the third parties who are affected by water trading but do not participate in the negotiations and transactions and have no power on the water trading. Last, water transaction costs should include sufficient funds to help alleviate the third party effects. The third parties should be compensated by water, monetary and other methods.