The Analysis of Transaction Costs in Water Policy Implementation in South Africa: Trends, Determinants and Economic Implications

Abstract

Water is a complex economic good. It requires optimal management to control rising scarcity and competition for use. South Africa like many other parts of the world is in the process of implementing market-based water policy reforms to attain equity, efficiency, and sustainability in water use. However, these reforms have not been entirely successful and water allocation problems persist. This could be due to many contributing factors, certainly, but this paper narrows down to identify possible transaction costs that would arise from the policy process. Transaction costs can be great hindrances to policy formation and implementation especially if they constitute a large component of total policy costs. However, transaction costs remain generally unmeasured and this study fills in this gap for the Olifants basin of South Africa. Specifically, the study identifies and quantifies transaction costs incurred by various stakeholders in the water policy process in the Olifants basin in South Africa. Further, determinants of irrigation farmers’ transaction costs are assessed using regression approaches. Results from this study allow evaluating existing policies ex-post for improvement purposes.