Modelling Supply and Demand Functions in the Water Market Under Uncertainty Conditions

Water markets have been introduced recently as an appropriate alternative to bureaucratic control and allocation of water resources. Water markets increase water use efficiency through the transfer of water to higher value uses. Several studies have been carried out to simulate hypothetical water markets under conditions of both certainty and uncertainty to show the potential gains that can be achieved by market participants. However, the effect of water supply and price risk has seldom been analyzed by the water market models presented. This study endeavours to introduce output and water input price risks into the water market models. For this purpose, an econometric mean-variance model, under output price risk and water market price risk is theoretically developed to derive demand and supply functions. This approach facilitates empirical estimation of demand and supply functions in actually formed water markets.