First-degree price discrimination water bank to reduce reacquisition costs and enhance economic efficiency in agricultural water buyback

Abstract

In water buyback programs a public institution (the water bank) purchases predetermined amount of water from willing sellers, part of which can be reallocated to users in a subsequent lease phase. This makes possible to buy water at low monopsonistic prices and sell a fraction of this water at high monopolistic prices, where the water reacquired in excess of sales is used to restore natural assets. We propose a price discrimination water bank where the public institution leverages its monopsonistic (monopolistic) position to pay (ask) a price for every unit of water sold (bought) that matches the reserve price of every willing buyer (seller) in the market. Thus, both the consumer and producer surpluses are wholly transformed into public revenues, which reduces the budgetary burden of the environmental restoration without negatively impacting economic efficiency. We illustrate the performance of the price discrimination water bank under uncertainty through an hydroeconomic multi-model ensemble that is applied to the Upper Douro sub-basin (Spain). Our results show that the price discrimination water bank can achieve the same water reacquisition target as a conventional water bank (no price discrimination, no lease phase) at a significantly lower cost (59.5%–288.8% reduction) while achieving a significantly higher productive surplus (331%–570% increase).