Measuring the administrative water allocation mechanism and agricultural amenities

Many arid countries use an administrative water allocation mechanism. Quotas, price discrimination, and increasing block tariffs are set and enforced by prohibiting the resale of water. Critics of this mechanism argue that allocation is politicized, subjective and slow to respond, and therefore misallocates water compared to a market mechanism. However, an administrative mechanism also promotes social goals that are not valued economically. In this paper, both positive and negative impacts of the administrative allocation are explored, using a general equilibrium model and with Israel as a case study. The model concludes that from 1995 to 2006, potable water misallocation in Israel was relatively small, on average of 5.5 percent of the potable water supply. The value of agricultural amenities is imputed at approximately 2.3 times agricultural output. At the margin, introducing a water market in Israel is not recommended, i.e., net-social welfare would fall. JEL classification: C68 ; Q15 ; Q25 ; Q28 ; O21