Handbook on the Economics of Natural Resources

Handbook on the Economics of Natural Resources

Edited by Robert Halvorsen and David F. Layton

The topics discussed in the Handbook on the Economics of Natural Resources are essential for those looking to understand how best to use and conserve the resources that form the foundation for human well-being. These include nonrenewable resources, modeling of biological resources, conservation of biological resources and water resources. The expert contributors of this Handbook provide solutions to many of the problems that growing populations now face, and sketch the likely future developments in the field of natural resource economics whilst paving the way for new thinking.

Chapter 16: Water institutions and the law of one price

Eric C. Edwards and Gary D. Libecap

Subjects: economics and finance, environmental economics, environment, environmental economics


This chapter examines the economics of the water rights and markets in the US West. This is the region of North America where water supplies are most limited in face of rapidly growing demands. The striking feature of water markets is how unlike those for other commodities they appear. In particular, the law of one price does not hold. Agricultural commodities, for instance, empirically do not have systematic price differences that persist over time (Baffes 1991). This is not the case for water. In water markets, municipal and industrial users typically pay much more than do agricultural agents to acquire and use water. Examples abound that demonstrate observed price differences that are not immediately explained by properties of the water or infrastructure. Price disparities exist in local water markets like Nevada’s Truckee Basin, where the median price of 1025 agriculture-to-urban water rights sales between 2002 and 2009 (2008 prices) was $17 685 per acre-foot (AF), whereas for 13 agriculture-to-agriculture water rights sales over the same period the median price was $1500/AF.1

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