Market design can help solve global water scarcity. Here’s how

(Credit: Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Paul Milgrom, Professor of Humanities and Sciences, co-founder and Chairman of Auctionomics, Stanford Graduate School of Business & Silvia Console Battilana, Co-founder and Chief Executive Officer of Auctionomics, Stanford University


  • Market design is an economic tool that can be used to create and refine marketplaces and exchanges to improve the allocation of scarce resources.
  • A successful initiative in the US to reallocate scarce radio spectrum demonstrates the power and potential of market design.
  • We outline how these methods can play a critical role in solving the problem of water allocation globally.

This is one of a series of articles written by Young Global Leaders with action-oriented ideas to improve the state of the world by 2030.

In 2010, the US faced a challenging allocation problem. Demand was surging for a resource vital to daily life, but the available supply was being used by incumbents that had built an important industry around it. Moreover, incremental transfers to new uses were impossible. Could new rules alleviate growing scarcities while respecting existing users’ rights and enable a voluntary, multi-party reallocation?

The resource was not water but radio spectrum – the electromagnetic frequencies used for wireless phone calls, smartphone data, and emergency communications. Demand for spectrum had grown as more people streamed movies, placed video calls, and used mobile apps. But because spectrum that would have been ideal for smartphone apps was taken up by a fragmented industry of TV broadcasters, there wasn’t enough bandwidth for mobile uses.

Our company, Auctionomics, advised the US Congress and Federal Communications Commission to solve the problem through a series of changes culminating in the Broadcast Incentive Auction. Spectrum would be bought back from less-valuable broadcast uses and resold for cellular applications, while generously protecting incumbents who wanted to continue their traditional uses. That auction, held in 2016 and 2017, acquired a large amount of spectrum, reallocated it to higher-value uses, and raised $19 billion in gross revenue.

What is market design and how can it be applied?

The success of this initiative demonstrates the power and potential of market design to create and refine marketplaces and exchanges to improve the allocation of scarce resources. The auction design was integrated with important legislative changes that made spectrum rights more easily exchangeable while allowing incumbents to continue operating with little or no disruption.

This approach is widely applicable, especially in environmental management. Additional new scarcities will require a reallocation of resources that pays close attention to both social and environmental challenges and the interests of existing users, who will resist changes they deem harmful.

Market design, which has emerged as an important subfield of economics in the past 25 years, provides new economic theory and related algorithms, evidence, and examples to help policymakers implement effective solutions.—Paul Milgrom and Silvia Console Battilana.

Market design methods have already solved several important everyday problems of matching resources to users. Applications include internet advertising (seeing online ads that are appropriate and match your interests), organ transplantation (finding a compatible donor for a loved one), medical residency matching (connecting newly minted doctors their first job), and charitable food donations (stocking the local food bank with the most-needed items).

Policymakers can adapt the same theory and practices for new and evolving allocation problems. For example, market design can help address COVID-19 vaccine shortages by allowing exchanges of the ingredients and supplies (such as filters, tubing, and pharma bags) needed for vaccine production.

Likewise, financial instruments using cryptocurrencies have introduced decentralized designs with fully automated trading. Spectrum-license auctions will need to change again to accommodate 5G technologies and support small-scale internet-of-things and artificial intelligence applications. The success of cap-and-trade programmes – for carbon dioxide emissions, fisheries, and other environmental goods – will depend on how well regulators can define the products to be exchanged and set rules that encourage participation while achieving societal objectives.

Equitable allocation of water

Market design will also play a critical role in solving the problem of water allocation. Many of the world’s existing rights to freshwater – both surface water and groundwater – have already been granted and grandfathered in complex ways to cities, farmers, and industrial users. In some cases, each individual trade of these rights requires governmental approval; other jurisdictions prohibit such trading entirely.

These restrictions and historical rules have led to highly inefficient allocations. Water may be unavailable to towns that require more of it as they grow, even when those urban and residential uses are a hundred times more valuable than the rural ones they would supplant. Certain industrial firms whose rights are based on historical use may have an incentive to overuse water, even during droughts, to retain their rights to future allotments. Where trading of rights is limited or prohibited, poor price signals make it difficult even to assess which uses are most valuable. And water demand will increase and shift as climate change continues to upend historical usage patterns. water, health, environment

What is the Forum doing to address the global water challenge?

Water security – both sustainable supply and clean quality – is a critical aspect in ensuring healthy communities. Yet, our world’s water resources are being compromised.

Today, 80% of our wastewater flows untreated back into the environment, while 780 million people still do not have access to an improved water source. By 2030, we may face a 40% global gap between water supply and demand.

The World Economic Forum’s Water Possible Platform is supporting innovative ideas to address the global water challenge.

The Forum supports innovative multi-stakeholder partnerships including the 2030 Water Resources Group, which helps close the gap between global water demand and supply by 2030 and has since helped facilitate $1Billion of investments into water.

Other emerging partnerships include the 50L Home Coalition, which aims to solve the urban water crisis, tackling both water security and climate change; and the Mobilizing Hand Hygiene for All Initiative, formed in response to close the 40% gap of the global population not having access to handwashing services during COVID-19.

Want to join our mission to address the global water challenge? Read more in our impact story.

The success of the US radio spectrum auction points to a solution. Instead of revoking incumbents’ spectrum rights unilaterally, Congress redefined them in a way that made trading them possible and simple, and then allowed TV broadcasters to decide for themselves whether to continue their previous uses or decline to participate. The rights that were sold were then reconfigured to be suitable for new uses and efficient trading, while those that were unsold remained fit for existing purposes.

A similar reorganization of water rights could protect existing users not wishing to sell, while creating tradeable rights for others that would allow water to flow to its most valuable use. Any attempt to compel all current users to participate will likely be thwarted by legal and political opposition, but a fully voluntary market styled on the same principles as the one for radio spectrum could accommodate resisters while drastically improving the allocation of water rights. Moreover, policymakers could use a portion of the value freed by any reallocation to offset inequities – for example, by granting credits to rural towns or small agricultural producers so that they receive the water resources they need.

Allocating water efficiently and fairly will require innovation, collaboration, and regulation. In this and other domains, market design puts practical economic theory in the service of establishing rights and introducing effective rules and algorithms. That way, we can bring accommodate diverse market participants, harness new technologies, and maximize the public good.

This decade the world will likely witness more social, economic and environmental changes than over the last century. While the COVID-19 pandemic called for immediate reforms, the mainstreaming of stakeholder capitalism, the impacts of climate change, the escalation of next-generation technologies, and the empowerment of citizenship will pave the way for a ‘resetting’ of the global economy and social practices.

This article series presents pioneering, forward-looking, and action-oriented ideas that should be adopted up to 2030 to improve the state of the world. The WEF invited a group of individuals who have been selected as Young Global Leaders (YGLs) in the course of their careers. Authors include heads of government, business leaders and scientists, prominent intellectuals or civil society leaders.

On an annual basis and since 2004, the World Economic Forum identifies the world’s most promising leaders under the age of 40 — people driving innovation for positive change across civil society, arts, culture, government and business. This series, an initiative of the Forum of Young Global Leaders of the World Economic Forum, harnesses the expertise and experience of this group of leaders.

For additional information on the article series, please contact Rodrigo Tavares (curator).

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

European Commission: the LED lights of your Audi A6 shall save our planet

A new approach to scaling-up renewable power in emerging markets

Ensure that widows are ‘not left out or left behind’, UN chief urges on International Day

COVID-19 wave III and the lessons learned

Threats from mammoth banks and Brussels fuel May’s poll rates

EU and Amazon cut deal to end antitrust investigation over e-books deals

MEPs urge EU countries to be transparent about their COVID-19 vaccine supplies

Here’s how private investors can turn plastic into gold

Still a long way to go to achieve gender equality in all EU countries

Africa is set to get its first vertical forest

‘Millions facing starvation’ – Global political and business leaders on the economic impact of COVID-19

How the gender commuting gap could be harming women’s careers

Will 2020 be the year blockchain overcomes its hype?

Progress in medical research: leading or lagging behind?

Bacteria vs. humans: how to fight in this world war?

The future of energy is being shaped in Asia

What we know and what we don’t know about universal basic income

The first new university in the UK for 40 years is taking a very different approach to education

OECD household income up 0.7% in first quarter of 2018, outpacing GDP growth

First seat projections for the next European Parliament

The energy industry is changing. Are governments switched on?

What is the IMF telling Eurozone about fiscal and banking unification?

Trump ‘used’ G20 to side with Putin and split climate and trade packs


Re-thinking citizenship education: bringing young people back to the ballot box

Commission issues guidance on the participation of third country bidders in the EU procurement market

Car rentals: EU action leads to clearer and more transparent pricing

What’s going on in Chernobyl today?

Here’s how we get businesses to harmonize on climate change

Why are the Balkans’ political leaders meeting in Geneva this week?

Support for EU remains at historically high level despite sceptics

US pardons for accused war criminals, contrary to international law: UN rights office

European Business Summit 2015: In search of a vision for the future

Brexit casts a shadow over the LSE – Deutsche Börse merger: a tracer of how or if brexit is to be implemented

Migrants and refugees face higher risk of developing ill-health, says UN report on displaced people in Europe

Autumn 2019 Standard Eurobarometer: immigration and climate change remain main concerns at EU level

Stop the waste: UN food agencies call for action to reduce global hunger

The term AI overpromises. Let’s make machine learning work better for humans instead

How blended finance helped to keep energy supplies flowing during COVID-19

What will a post-pandemic economy look like? Here’s what chief economists expect

Innovation is the key to the pay-TV industry’s long-term growth

Mergers: Commission approves GlaxoSmithKline’s acquisition of Pfizer’s Consumer Health Business, subject to conditions

Coronavirus: Commission launches call for innovative response and recovery partnerships between EU regions

Parliament names radio studio after journalists murdered in December attack

4 things to know about the state of conflict today

World-famous cultural institutions closed due to coronavirus are welcoming virtual visitors

As Houthi forces withdraw from key Yemeni ports, UN monitoring chief welcomes ‘first practical step on the ground’

Get out, stay out: how financial resilience helps end poverty

The ‘ASEAN way’: what it is, how it must change for the future

30 years of tissue engineering, what has been achieved?

Businesses are lacking moral leadership, according to employees

Mental health and suicide prevention

‘Perseverance is key’ to Iraq’s future, UN envoy tells Security Council

Belgium: Youth Forum takes legal step to ban unpaid internships

European Commission recommends common EU approach to the security of 5G networks

The Future of Balkans: Embracing Education

The European Parliament fails to really restrict the rating agencies

Gas pipeline in the European Union. (Copyright: EU, 2012 / Source: EC - Audiovisual Service / Photo: Ferenc Isza)

EU Investment Bank approves € 1.5bn loan for Trans Adriatic Pipeline (TAP)

Could Europe become the first climate-neutral continent?

Venezuela’s needs ‘significant and growing’ UN humanitarian chief warns Security Council, as ‘unparalleled’ exodus continues

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s