Water quality and incentive coordination in water markets: The eastern route of China’s South-North Water Transfer Project

Abstract

The large-scale implementation of water market programs worldwide has increased attention, while little research has paid attention to the water quality-related incentive coordination in water markets. Through the case of the water market of the East Route of China’s South-North Water Transfer Project (SNWTP-ER), this study adopts a differential game perspective to examine the role of coordination mechanisms in water markets critically. By drawing on a large number of literature, which conceptualizes the incentives of the water market as rooted in market environmentalism, this study opens up the view on incentive-compatible coordination in water markets. By combining the numerical illustration of SNWTP-ER, this study finds that the coordination mechanism can mobilize a series of incentive-compatible coordination techniques and practices to achieve the optimal state of individuals and society simultaneously. In addition, the incentive-compatible coordination mechanism overcomes current water markets’ inability to improve water quality and water allocation simultaneously, reflecting that market environmentalism may be a feasible solution to environmental crises. Finally, designing an incentive-compatible coordination mechanism in water markets is still challenging. The mechanism depends not only on the price and quality elasticity of water demand but also on finding the optimal coordination coefficient.