Market failure or governmental failure? A study of China's water abstraction policies

Purpose: Under increasing signs of water shortages and depletions, fundamental questions need to be asked about why these market-based instruments did not work effectively at the local level in China. Answers to these questions are crucial for the analysis of water management in China. Originality: There is a rather large literature on this topic, but this article presents an important supplement to that literature in the realm of water allocation which remains a critical issue in China's ongoing economic restructuring. Key literature / theoretical perspective: the nature of decentralized decision-making authority in China, and the challenges that central mandates have in local implementation. Design/methodology/approach: This paper adopted a new angle for analyzing applications of market-based instruments towards water resources in China. By expanding the analysis beyond rational choice of economic instruments, it demonstrates the institution dimension of policy implementation at the local level in China. Findings: It argues that three peculiar features of China’s water institutions have created a context where local governments deal with abstraction activities differently from regulatory expectation, eventually leading to local governmental failure and affecting the implementation of water abstraction policies in several ways. Research limitations/implications: The issue of institutional barriers to the introduction of market-based instruments of resource allocation is of course key in China. Practical and Social implications: The understanding of water abstraction policies in China is worthwhile, both as an illustrative application of market-based instruments in a transitional and developing country, and as a case which sheds light on improving China’s water management system.