Transaction costs associated with agricultural water trading in the Heihe River Basin, Northwest China

Abstract

Trading in water via a market has become an effective way to deal with water resource scarcity. Transactions costs (TCs) are known to prevent markets from operating efficiently or from forming altogether. Therefore, evaluation of the level of transactions costs is an important precursor to establish an efficient water market. We analyze one water transaction scenario in the context of government regulation in Zhangye City in the middle reach of the Heihe River Basin (HRB) in China: water rights-trading between irrigation areas in agricultural use, which is one of the most urgent scenarios and maximizes the likelihood of a transaction in future. The results show that without calculating the transfer costs and the third-party effect costs, TCs per unit water range between 0.004 and 0.247yuan/m3 based on the set of transaction scales and cost limits in the middle reach of the HRB. Under the most realistic transaction case i.e., only one purchaser in the Luotuocheng irrigation district in Gaotai County and several sellers located in Ganzhou County, the lowest TCs per water are associated with trading between the Daman and Luotuocheng irrigation districts at a maximum trading scale of the water amount and with minimum costs. The highest TCs result from obtaining water from the Xidong intake in the Xijun irrigation district. In addition, given the highest permitted trading price of the local government-set standards (three times the agricultural water price, approximately 0.3yuan/m3), the transaction costs would range from 1% to 93% of the water trade price, and acceptable lower transaction costs can be obtained through appropriate operations and trading scales.