A design for a fresh water spot market

This paper proposes a design for a fresh water spot market. The design has the groundwater of the New Zealand Canterbury Plains in mind, but would be appropriate for almost any region. In our market design, a market manager will operate a hydrology model and a Linear Program (LP), based on widely available software. The hydrogeology model calculates the effects of users' proposed abstraction rates. The LP finds allocations that maximise the sum of buyer and seller surplus, while satisfying environmental constraints expressed in terms of hydraulic heads and gradients in specific locations. The model produces a price for every location of interest. The price at a given location is the shadow price on the associated user's supply of water. Users are then charged their allocation times the market price at their location, and the market clears. We have written the software and are beginning testing.