Analyzing the potential for water quality externalities as the result of market water transfers

This article presents a comparative static framework for predicting the wat er quality outcomes of water trade. The focus is on a comprehensive treatme nt of water quality processes. Previous work has assumed that reductions in agriculturally induced water quality externalities are an increasing funct ion of irrigation application rates. The comparative static framework used here allows for the possibility that water transfer can result in both posi tive and negative water quality externalities as the result of dilution, ev en when the rate of loading decreases. We apply our model to the Owyhee aqu ifer of eastern Oregon, an area where nitrate concentrations exceeded the E PA standard of 10 ppm in over 30% of area test wells in 1991. In conclusion , we describe conditions when water trade is most likely to generate positi ve versus negative water quality externalities. We also draw policy conclus ions about the kinds of institutional rules best suited to balance trade-of fs between gains to trade, water quality externalities, and transactions co sts.