The Economic Analysis of the Common Pool Method through the HARA Utility Functions

TL;DR

This paper develops a mathematical model using HARA utility functions to analyze water market trading systems, demonstrating the advantages of the common pool method over pair-wise trading through economic concepts like Nash Equilibrium and Pareto optimality.

Contribution

It introduces a novel mathematical framework for evaluating water trading systems, highlighting the benefits of the common pool method over traditional pair-wise trading.

Findings

The common pool method achieves higher social welfare.

It demonstrates better stability and Pareto efficiency.

The model confirms the advantages through Nash Equilibrium analysis.

Abstract

Water market is a contemporary marketplace for water trading and is deemed to one of the most efficient instruments to improve the social welfare. In modern water markets, the two widely used trading systems are an improved pair-wise trading, and a 'smart market' or common pool method. In comparison with the economic model, this paper constructs a conceptual mathematic model through the HARA utility functions. Mirroring the concepts such as Nash Equilibrium, Pareto optimal and stable matching in economy, three significant propositions are acquired which illustrate the advantages of the common pool method compared with the improved pair-wise trading.