Application of Mechanism Design and Matching Theory to Water Market Design: An Institutional Approach

In order to estimate the demand and supply functions of water, this study has used system of simultaneous equations for the period 2001-2012. Hence, real and nominal marginal price of the industry and mining demand was estimated 6532.45 and 12072.2 Rials. Also based on agricultural water demand real and nominal marginal price was estimated 977.21 and 1698.442 Rials. The result of economic value of water in different sections relatively showed that real and nominal economic value of per m3 in residential sector are 4462.34 and 8430.3, in agricultural sector are 620.399 and 1099.813, in industrial and mining sector are 4110.54 and 7727.08, in recreational sector is 1146.38 and finally in environmental sector is 596.739 Rials. This study design a matching based on the long-run supply and aggregate demand equilibrium, marginal prices and economic water value in different sections with use of mechanism design and two sided matching theory. Mechanism based on Gale- Shapley or deferred acceptance algorithm was solved.