Transboundary externalities and the river sharing problem

Abstract

Population increase and economic growth have caused competing demands to occur over transboundary water resources. The property rights on such water resources are not well defined, and therefore competing demands give rise to conflict among riparian states. In this thesis, we focus on successive transboundary rivers (transboundary rivers where riparian states are ordered one after another along the river). By virtue of this geographic structure, the states along the river have asymmetric access to the river water. In a setting like this, it is necessary to allocate water in an equitable and self-enforcing fashion. The literature advocates the usage of the Pareto optimal (efficient) allocation of water as a water allocation scheme. This formal problem in economic literature which deals with efficient water allocation and self-enforcement is termed as the River sharing problem. However, the river sharing model in literature does not address several externality issues which occur along a transboundary river. In this thesis, we extend the traditional river sharing model so as to accommodate the negative externality aspects of pollution, storage, and flooding. These aspects may be seen to have a profound influence on the propensity for conflict on a transboundary river basin. In Part-I of this thesis, the issue of pollution and its implication on water allocation on a transboundary river is addressed using a two-agent static model. We examine the allocation under non-cooperative behaviour and propose two methods for cooperation. The first method is a bilateral trading mechanism in which the agents interact as buyer and seller and thus arrive at an efficient allocation of the water resource. This bilateral trading approach would ensure that the resulting payoff allocation is self-enforcing. The cooperative equilibrium which arises from the trade process facilitates in understanding the interplay between water quality and the amount of water traded...