Transboundary water problems as "jurisdictional externalities" - Increased economic efficiency through institutional reforms

Problems of interjurisdictional water allocation and management are found worldwide. Negative externalities are likely to be created when the boundaries of physical water systems fail to correspond with the boundaries of the institutions that have power to govern or otherwise affect them. Transboundary situations create these "jurisdictional externalities" almost by definition and range from international and interstate scope to local issues. In the water sector, jurisdictional externalities are especially difficult to modify because of the unidirectional nature of the resource flow. While the well-known "Coase theorem" states that solutions can be bargained out, in reality only in situations where "interconnected games" are being played is bargaining likely to lead to efficient and equitable solutions. Many transboundary problems would be solved by a return to the river basin as the unit of management, while the expansion of water markets within the river basin context would serve to provide for the internalization of many current externalities. Flexible allocation rules that reflect real-time hydrologic conditions can greatly improve on the fixed rules that are incorporated in most interstate and international river compacts.