Water Markets Water Markets and Water Allocationand Water Allocation

Wednesday, March 23Wednesday, March 23

Property Rights in WaterProperty Rights in Water

Property rights in water determined by Property rights in water determined by lawslaws

Most water use law is developed at the Most water use law is developed at the state levelstate level Water quality addressed by federal and state Water quality addressed by federal and state

lawslaws Surface water and ground water are Surface water and ground water are

treated differently by state lawstreated differently by state laws

Rights in Surface WaterRights in Surface Water

Rights are provided for use of the water, Rights are provided for use of the water, not of the water itselfnot of the water itself

Riparian rightsRiparian rights Owners of riparian land have right to Owners of riparian land have right to

reasonable use of waterreasonable use of water Earliest system of water rights in the U.S.Earliest system of water rights in the U.S. Most common in Eastern, “water-rich” statesMost common in Eastern, “water-rich” states

Rights in Surface WaterRights in Surface Water

System of Prior AppropriationSystem of Prior Appropriation system developed in arid regions of the system developed in arid regions of the

western U.S.western U.S. ““first in time, first in right”first in time, first in right”

Administration of appropriationsAdministration of appropriations stream flows quantifiedstream flows quantified appropriations allotted based on stream flowappropriations allotted based on stream flow ““use it or lose it”use it or lose it” Most junior rights-holder is first to lose rights Most junior rights-holder is first to lose rights

during drought periodduring drought period

Rights in Ground WaterRights in Ground Water

Owner of surface land rights has right to Owner of surface land rights has right to reasonable use of water withdrawn from reasonable use of water withdrawn from her wellsher wells

Most states implement a permit system Most states implement a permit system with withdrawal limits for any non-with withdrawal limits for any non-residential usesresidential uses

Administrative agency assesses size of Administrative agency assesses size of aquifer and recharge rateaquifer and recharge rate May limit subsequent permits if aquifer is May limit subsequent permits if aquifer is

threatenedthreatened

Transfer of Water RightsTransfer of Water Rights

In general, riparian users cannot sell their In general, riparian users cannot sell their water rightswater rights

In prior appropriation states, In prior appropriation states, appropriations are generally returned to appropriations are generally returned to the state to re-issue to new junior rights- the state to re-issue to new junior rights- holdersholders

Ability to transfer ground water rights Ability to transfer ground water rights depends upon state lawdepends upon state law Most common is allowing transfer subject to Most common is allowing transfer subject to

limitations imposed by administrative agencylimitations imposed by administrative agency

Determining Water DemandDetermining Water Demand

90

95

100

105

110

115

120

125

130Irrigated crop

Water ( ac. ft.)

Total ProductTotal Product

0

2

4

6

8

10

12

Determining Water DemandDetermining Water Demand

Marginal Marginal ProductProduct

Irrigated crop

Water ( ac. ft.)

MPMPxx

Additional production (Y) obtained from the Additional production (Y) obtained from the use of one additional unit of input (X)use of one additional unit of input (X)

VMPVMPxx = MP = MPxx x P x PYY

Value of one additional unit of input is equal to Value of one additional unit of input is equal to the additional amount of product obtained the additional amount of product obtained from that unit of input (MPfrom that unit of input (MPxx) times the value ) times the value

(price) of that product (P)(price) of that product (P) VMP = value of the marginal productVMP = value of the marginal product

Determining Water DemandDetermining Water Demand

Irrigation Water (acre feet)

$

VMPwater = MB or Demand for water

Determining Water DemandDetermining Water Demand

How would a change in the price of the irrigated crop impact the demand for irrigation water?

Irrigated Crop

$

Change in demand for irrigated crop will Change in demand for irrigated crop will change derived demand for irrigation waterchange derived demand for irrigation water

D

S = MC

Irrigation Water (acre feet)

$

VMPwater = MB or Demand for water

Changing Water DemandChanging Water Demand

Water

$

Dr

Demand for water in rural uses

Water

$

Du

Demand for water in urban uses

$

Dr

$

Du

Urban water use Rural water use

$

Dr

$

Du

Urban water use Rural water use

Efficient allocation of water: where MBr = MBu = P

W*

P

(Assuming cost to each is the same)

$ $

Urban water use Rural water use

Du = MBu

Dr = MBr

W*

MNBu

MNBr

Where MBr = MBu = P: MNBr = MNBu

$

Du

Dr

With water shortage, urban users will outbid rural users (MBu > MBr)

0 WaterWs

$ $

Urban water use Rural water use

DuDr

What if rural users have prior rights?

Wr,u

$ $

Urban water use Rural water use

DuDr

P

Rural users have prior right but can gain from trade

Wr,u

Gains to urban users

Gains to rural users

$ $

Urban water use Rural water use

DuDr

What if urban users have prior rights?

Wu,r

$ $

Urban water use Rural water use

DuDr

P

Urban users have prior right but can gain from trade

Wu,r

Gains to urban users

Gains to rural users

$ $

Water use in period 1 Water use in period 2

Efficient allocation across time periods

W*

MNB1

PV MNB2