Analysis of water market effects on farm profits, nitrate pollution and temporary agricultural labour.

Abstract

The evidence available about the external effects of functioning water markets is ambiguous. While some authors have shown that water exchanges diminishes the polluting effects of irrigated agriculture, others conclude otherwise. The joint use of contaminant input taxes and the establishment of water markets gives rise to ambiguous results, because water and fertilisers are not substitutes. The objective of this paper is to examine the joint effects of establishing an hypothetical spot water market among farmers and a nitrogen tax on irrigators’ benefits, nitrogen pollution and hired external labour. Two non-linear models are formulated and developed that simulate irrigators’ behaviour and the functioning of inter-district water markets in the Guadalquivir basin. Results show that water markets would increase hired farm labour and irrigators’ surplus, though at the cost of increasing nitrates pollution. The reduction of nitrates contamination achieved by the tax is attenuated as a result of water exchanges, which in turn contribute to reduce the negative income effects caused by the nitrates tax. Water markets increase unambiguously the social benefits resulting from increasing hired labour.