A Tale of Two Countries: Markets and Transboundary Water Governance Between the United States and Mexico

Abstract

While there is a robust literature about using tradeable permits as a solution to pollution externalities, less work has applied these principles to the area of transboundary water management. This article proposes the use of transboundary water banking as a means for addressing issues of water externalities, conflict over water resources, and incentive compatibility. First, the article provides clarity to this discussion by synthesizing relevant literature over transboundary water governance, focusing on the experience between the United States and Mexico over the Colorado River. Second, the article formalizes the idea of a transboundary water bank and the efficiency of an auctioned versus grandfathered permit program. Third, the article provides a brief formulation of the market design elements of such a scheme, namely four conditions that enable a sort of Nash Equilibrium among agents. The article concludes by alluding to the parallels between energy and water markets. While only a start, this article seeks to catalyze more formal mathematical modeling of solutions to transboundary water governance.