Water clubs: a new model for managing freshwater in small catchments *

Abstract

Over the past 30 years market-based mechanisms have been upheld as the gold-standard of water governance approaches. However, while some water markets have been successful, many struggle to meet the strict institutional preconditions for efficiency and effectiveness, which has implications for social welfare and public good provision. As pressures on water resources increase, there is a growing need to consider alternative market designs that foster more cooperation between water users. Drawing on club theory and game theory, this paper investigates the economic and environmental benefits of (re)designing water markets as clubs. It finds that in small catchments, the introduction of group-level trading can increase provision of the public good, improve social welfare, and reduce free-riding when compared with a regulatory status quo. It also finds that the club model performs best when the number of active traders is low—a result that challenges the common assumption regarding group size and effective market performance. In local contexts, the group-level trading may also help characterise the optimal group size by weighing the benefits from more trading opportunities against the losses from free-riding.