We examine potential third-party effects arising from trading water from one region (rural) to another (urban). Using labor, water and heterogeneous land, rural agents produce a traded agricultural good and nontraded service good. Absent job market frictions, increased water trading improves per capita regional welfare, but aggregate service income can increase (decrease) while individual land rents decrease (increase). If labor experiences job market frictions, water trading can trigger socially inefficient land fallowing, and a decrease in per capita regional welfare. Simulation results confirm the no-job-market-friction model predictions.
Bibliographical noteFunding Information:
The authors thank Stephen Swallow, and three anonymous reviewers for insightful comments and helpful suggestions. Rodney Smith gratefully acknowledges funding support by the Economic Research Service-USDA cooperative agreement number 43-3AEL-0-80035.
- Job market frictions
- Regional economics
- Resource economics
- Third-party effects
- Water markets