First-degree price discrimination water bank to reduce reacquisition costs and enhance economic efficiency in agricultural water buyback

In water buyback programs a public institution (the water bank) purchases predetermined amount of water from willing sellers, part of which can be reallocated to users in a subsequent lease phase. This makes possible to buy water at low monopsonistic prices and sell a fraction of this water at high monopolistic prices, where the water reacquired in excess of sales is used to restore natural assets. We propose a price discrimination water bank where the public institution leverages its monopsonistic (monopolistic) position to pay (ask) a price for every unit of water sold (bought) that matches the reserve price of every willing buyer (seller) in the market. Thus, both the consumer and producer surpluses are wholly transformed into public revenues, which reduces the budgetary burden of the environmental restoration without negatively impacting economic efficiency. We illustrate the performance of the price discrimination water bank under uncertainty through an hydroeconomic multi-model ensemble that is applied to the Upper Douro sub-basin (Spain). Our results show that the price discrimination water bank can achieve the same water reacquisition target as a conventional water bank (no price discrimination, no lease phase) at a significantly lower cost (59.5%-288.8% reduction) while achieving a significantly higher productive surplus (331%-570% increase).

Automated summary

In water buyback programs, a public institution buys water from willing sellers at low prices and sells a fraction of it at high prices, using the excess reacquired water for environmental restoration. A price discrimination water bank is proposed, where the public institution leverages its market position to match the reserve price of every buyer or seller, thus transforming the consumer and producer surpluses into public revenues without negatively impacting economic efficiency. The performance of this water bank is illustrated using an ensemble model applied to the Upper Douro sub-basin, showing lower cost and higher productive surplus compared to a conventional water bank.