This presentation provides an analysis of the efficient system of cap and trade on water to manage coupled externalities. Irrigation-induced salinity is an example of a setting where interdependant externalities exist, in this particular case affecting the quality and the quantity of surface and underground water resources. Hence water management is subject to various constraints differing in spatial scales - typically, catchment or river. Various combinations of diversion and recharge rights markets are analysed. It is highlighted that hydrological linkages have the consequence of coupling the associated policy instruments. It is also shown that a mix of two instruments is mode efficient than a unique instruments, even if the externalities are linked. Finally, some related research topics are proposed.
Group for Research in Decision Analysis