Water Markets and Water Allocation Wednesday, March 29

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 Water quality addressed by federal and state laws  Surface water and ground water are treated differently by state laws

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 Owners of riparian land have right to reasonable 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” states Most common in Eastern, “water-rich” states

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

Rights in Ground Water  Owner of surface land rights has right to reasonable use of water withdrawn from her wells  Most states implement a permit system with withdrawal limits for any non- residential uses  Administrative agency assesses size of aquifer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

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 Most common is allowing transfer subject to limitations imposed by administrative agency

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

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

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

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

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

Irrigation Water (acre feet) $ VMP water = MB or Demand for water Changing Water Demand

Water $ D r =MB Demand for water in rural uses MNB = MB - MC MNB r

Water $ DuDu Demand for water in urban uses MNB = MB - MC MNB u

$ Urban water useRural water use MNB u MNB r

Efficient allocation of water: where MNB r = MNB u $ Urban water useRural water use MNB u MNB r

$ DuDu DrDr With water shortage, urban users will outbid rural users (MB u > MB r ) 0Water WsWs

$ $ Urban water useRural water use DuDu DrDr What if rural users have prior rights? W r,u

$ $ Urban water useRural water use DuDu DrDr P Rural users have prior right but can gain from trade W r,u Gains to urban users Gains to rural users

$ $ Urban water use Rural water use DuDu DrDr What if urban users have prior rights? W u,r

$ $ Urban water use Rural water use DuDu DrDr P Urban users have prior right but can gain from trade W u,r Gains to urban users Gains to rural users

$ $ Water use in period 1Water use in period 2 Efficient allocation across time periods W* MNB 1 PV MNB 2