Water Markets and Water Allocation

1. Water Markets and Water Allocation Wednesday, March 23

2. Property Rights in Water • Property rights in water determined by laws • Most water use law is developed at the state level • Water quality addressed by federal and state laws • Surface water and ground water are treated differently by state laws

3. Rights in Surface Water • Rights are provided for use of the water, not of the water itself • Riparian rights • Owners of riparian land have right to reasonable use of water • Earliest system of water rights in the U.S. • Most common in Eastern, “water-rich” states

4. Rights in Surface Water • System of Prior Appropriation • system developed in arid regions of the western U.S. • “first in time, first in right” • Administration of appropriations • stream flows quantified • appropriations allotted based on stream flow • “use it or lose it” • Most junior rights-holder is first to lose rights during drought period

5. Rights in Ground Water • Owner of surface land rights has right to reasonable use of water withdrawn from her wells • Most states implement a permit system with withdrawal limits for any non-residential uses • Administrative agency assesses size of aquifer and recharge rate • May limit subsequent permits if aquifer is threatened

6. Transfer of Water Rights • In general, riparian users cannot sell their water rights • In prior appropriation states, appropriations are generally returned to the state to re-issue to new junior rights- holders • Ability to transfer ground water rights depends upon state law • Most common is allowing transfer subject to limitations imposed by administrative agency

7. Determining Water Demand Irrigated crop Total Product Water ( ac. ft.)

8. Determining Water Demand Irrigated crop Marginal Product Water ( ac. ft.)

9. Determining Water Demand • MPx • Additional production (Y) obtained from the use of one additional unit of input (X) • VMPx = MPx x PY • Value of one additional unit of input is equal to the additional amount of product obtained from that unit of input (MPx) times the value (price) of that product (P) • VMP = value of the marginal product

10. Determining Water Demand $ How would a change in the price of the irrigated crop impact the demand for irrigation water? VMPwater = MB or Demand for water Irrigation Water (acre feet)

11. Change in demand for irrigated crop will change derived demand for irrigation water $ S = MC D Irrigated Crop

12. Changing Water Demand $ VMPwater = MB or Demand for water Irrigation Water (acre feet)

13. Demand for water in rural uses $ Dr Water

14. Demand for water in urban uses $ Du Water

15. $ Dr Urban water use Rural water use $ Du

16. $ Dr Urban water use Rural water use Efficient allocation of water: where MBr = MBu = P (Assuming cost to each is the same) $ P Du W*

17. Where MBr = MBu = P: MNBr = MNBu $ $ Du = MBu Dr = MBr MNBu MNBr W* Urban water use Rural water use

18. With water shortage, urban users will outbid rural users (MBu > MBr) $ Du Dr Ws 0 Water

19. What if rural users have prior rights? $ $ Dr Du Wr,u Urban water use Rural water use

20. Gains to urban users Gains to rural users Rural users have prior right but can gain from trade $ $ P Dr Du Wr,u Urban water use Rural water use

21. What if urban users have prior rights? $ $ Du Dr Wu,r Urban water use Rural water use

22. Gains to urban users Gains to rural users Urban users have prior right but can gain from trade $ $ P Du Dr Wu,r Urban water use Rural water use

23. Efficient allocation across time periods $ $ MNB1 PV MNB2 W* Water use in period 1 Water use in period 2