Agent-Based hydro-economic modelling for analysis of groundwater-based irrigation Water Market mechanisms

Abstract

Agricultural water markets play a crucial role in arid and semi-arid regions by reallocating water and transferring it from low-value uses to high-value uses. Several markets for surface water and groundwater are functioning all over the world to increase economic well-being of farmers and meet environmental flow requirements. However, there is not a consensus on precisely which market mechanism may be more environmentally and economically beneficial. This study presents an agent-based groundwater market model to analyze the economic and hydrologic impacts of three market mechanisms, designed based on the cap-and-trade scheme, that differ in the price discovery process, two of which are uniform price double-auction and the third is a discriminatory price double-auction. This study also analyzes the hydrologic and economic impacts of water buyback programs. Modeling results, applied to Rafsanjan Plain, an arid region in Iran, show that the discriminatory price double-auction is the most hydrologically and economically advantageous mechanism since it reduces the annual water level drawdown by 38 % and brings about more profits for farmers in comparison with other market mechanisms. Furthermore, the buyback program effectively reduces the inequality of wealth distribution (Gini Index) and increases farmers' net benefit while reducing their surplus.