Abstract

This paper presents a pricing model developed for the Chinese water rights trading market. The model focuses on the transfer of water rights from irrigators to industrial users in areas with limited water resources. Water rights trading is an efficient means of allocating water resources, and the price plays an important role in this market. At present, China lacks formal mechanisms for water rights pricing. Therefore, an integrated pricing model is built for situations when agricultural users implement water conservation measures and sell water rights to meet industrial water demand. The model accounts for project construction costs, operation and maintenance costs, renewal and reconstruction expenses, irrigation frequency compensation, and the economic cost of ecological damage. The marginal value of water rights to the industrial water user is also quantified on the basis of the production function accounting for water inputs. The pricing model is applied to an example of water rights trading between irrigators and industrial users in an agricultural area on the Yellow River near Ordos in Inner Mongolia.

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