Valuation Study

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Transaction Costs in Water Markets


Medium: Water

Country: China

Analytical Framework(s): Other

Unit(s): Transaction Cost

Study Date: 2004

Publication Date: 2005

Major Result(s)

Resource/Environmental Good CNY, per m3
average transaction cost1 0.08
maximum transaction cost 0.16
minimum transaction cost 0.05

Study Note: The size of transaction costs (TC) could be one of the reasons why water rights trading markets do not work effectively. Taking off from the study on barriers to water trading, this paper goes further to discuss the TC of WUR system implementation and trading. Bauer considered the obstacles and TC of water trading in Chile, but focused his analysis mainly on obstacles or barriers to trade. To date, no empirical study on the TC of water markets has been reported

Study Details

Reference: Junliang Zhang. 2005. Transaction Costs in Water Markets in China's Heihe River Basin. EEPSEA Research Report, No. 2005-RR7.

Summary: The high transaction costs (TC) of water trading is a possible reason why water rights trading markets do not work effectively. This paper identifies and analyzes the TC involved in the implementation of water use rights (WUR) systems and WUR trading in the Heihe river basin in northwest China. Both primary and secondary data were used to achieve the objectives of this study. Primary data was gathered by conducting questionnaire surveys in five selected irrigation areas in the Heihe river basin. The respondents included farmer households, and officials from the selected irrigation areas. This paper explores the relationships between TC and other barriers to WUR trading and analyzes the factors influencing TC using regression analysis. Finally it offers recommendations on how to minimize TC.

Site Characteristics: This study focuses mainly on the rural area of Zhangye City in Gansu Province and its irrigation water use. The city is 42 thousand km 2 in size and covers six counties. Located in one of the driest zones in the world, the Heihe River basin, Zhangye City consists of many oases mainly watered by the Heihe River, the second longest inland river in China. The primary water source of the Heihe River is snowmelted water from the Qilianshan Mountain. Zhangye City is severely short of water resources. It has only 9,937 m3 of water per hectare of farmland. Meanwhile, irrigation water use efficiency is only 20-30 percent. Agricultural water use accounts for about 95% of all water uses, and the extreme shortage of ecological water (water for maintaining the functioning and balance of the eco-system, such as protecting wetlands and rivers) has led to severe desertification and the drying out of lakes in downstream Heihe. In early 2002, the Ministry of Water Resources initiated an experimental first-ofits-kind project in China - establishing a water-saving society in Zhangye City. The aim of the project was to establish a tradable WUR system and to reallocate and use water resources reasonably and efficiently through market-based instruments. However, it was found that it was hard to implement such a system and that WUR trading was not popular.

Comments: The aims of this paper are to: (1) identify and analyze the TC of the implementation of a WUR system and WUR trading; (2) identify and analyze the factors influencing TC by regression analysis; and (3) offer ways to reduce TC.