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Abstract
The costs involved in the transfer of property, or transaction costs, and the costs of transporting water, can significantly affect the capacity of any market to operate efficiently. If water marketing is to achieve its full potential, markets must be designed to minimise these costs. A water allocation model was used to determine the effect of transaction costs on trade. The model includes whole farm non-linear programming models embedded in a spatial equilibrium framework to simulate a water demand function for agriculture in the Berg River as well as demand functions for urban water users in the larger Cape Town region. Positive mathematical programming (PMP) is included to calibrate the regional model to the exact observed base year resource use. The results clearly demonstrate the negative impact of high transaction costs on water trade.