Last month I described a version of this mechanism, which I call the All-in Auction. The AiA works like this:
- Assign property rights to all those who claim them. Some claims are spurious, but many are valid. Rights are awarded in order of seniority.
- Establish minimum environmental flows.
- Allocate "wet rights" to water above the minimum (sustainable yield) according to property rights, e.g., if yield equals 80 percent of rights, holders of the weakest (most recent) 20 percent of rights get no allocation.
- Set aside some per capita allocation of water -- the "human rights" entitlement.
- Put remaining wet rights up for sale to all comers -- urban, agricultural or environmental -- in a unit-price auction.
- Those who hold rights can buy them back for nothing, i.e., pay auction price but receive auction price equals zero. Put differently, farmers (who own most water rights) can opt out by buying from themselves. The human rights component is likely to be less than cities current rights, i.e., cities will "buy back" that water.
- The auctions would be run every so often to allow water users to change their decisions -- reducing the cost from "bad decisions", risk and uncertainty.
Bottom Line: My AiA design puts all rights into play (maximum liquidity) without taking rights from the owners (they can buy them back). The result (should be -- watch this place) a maximization of efficiency and protection of equity.