Economic Modeling

Allie Bauman and James Pritchett

Agricultural and Resource Economics, CSU

Reallocating water among users is recognized as a primary tool for meeting the gap between current water supply and projected water demand. Voluntary transactions between willing buyers and willing sellers is the primary tool currently used for reallocation. While economists have argued that water markets, in which water can be transferred voluntarily, eliminate inefficiencies in water allocation, these claims are largely based on analysis assuming perfectly competitive market conditions; conditions that rarely exist. The water market model will evaluate outcomes of water markets under imperfectly competitive competitions.

Overall goals and objectives

The first objective is to develop a better understanding of the potential for water markets to lead to an efficient allocation of water when perfectly competitive conditions do not exist. The impact of imperfectly competitive market conditions on overall changes in efficiency is investigated as well as the distribution of these welfare changes among water users for a representative river basin.

The second objective is to parameterize the model to represent the South Platte River Basin, using data from publically available data sources as well as from the other models included in the project.

The third objective is to use the model of the South Platte River Basin to evaluate outcomes of a water market under a variety of scenarios.

  • Given climate change and population change scenarios, how is water allocated in the short, medium and long run? What are the welfare outcomes associated with these projected allocations? How will rural economic activity change and how will agricultural productivity change?
  • What are the welfare gains from reducing transaction costs (namely costs incurred in water court) and how are those gains distributed?

The fourth objective is to explore water allocation and welfare outcomes of an institutional change that allows water users to sell the portion of the water rights that they save if they implement water saving technology.


The water market model uses GAMS (General Algebraic Modeling System) to solve an agent-based model of the South Platte River Basin using the EMP (Extended Mathematical Programming) framework and JAMS solver to declare and solve the scenarios presented in the previous section. Following Britz, Ferris, and Kuhn (2013), the problem is characterized as a MOPEC (Multiple Optimization Problems with Equilibrium Constraints) which allows the model to solve both the optimization problems of individual agents as well as how those actions affect the parameters of the market. The EMP framework takes the optimization problem, automatically generates the first order conditions, and then uses the JAMS solver to find a solution (Ferris, et al., 2009).

model schematic

Simple representation of the modeling framework

Expected Outcomes

Results from the model will provide a measure of water allocation, changes in rural economic activity, changes in agricultural productivity, and changes in welfare for water users in the South Platte River Basin in the short, medium and long run given a range of climate change and population change scenarios. The same scenarios will be evaluated to determine changes in welfare associated with two potential institutional changes: reducing transaction costs in the water market and allowing water users to sell the portion of the water rights that they save if they implement water saving technology.