The Los Angeles Times takes a look today at a conflict over whether to build a new dam and reservoir on the Cache la Poudre River in northern Colorado, where fast-growing suburbs are hunting around for every spare drop. Part of the difficulty in deciding whether projects like this should go forward is that, in the absence of a market for water rights, it's hard to adjudicate between competing demands on the water in question. Writing in Democracy, Michael Greenstone makes the case for the federal government to step in and establish such a market:
The current distribution system in the West means that water doesn’t end up in the hands of those who value it most. Agriculture uses about four-fifths of the water in the West, leaving just 20 percent for the region’s fast-growing cities. And yet water is far more valuable to towns and cities. One 1992 Texas study reports that the value of water in agricultural uses ranges from $300 to $2,300 per acre-foot, compared to $6,500 to $21,000 per acre-foot in urban uses. Clearly, water must be treated like other scarce resources. In practice, this requires a system that redirects water from individuals who don’t value it highly to those who do. In other words, we need a market for water rights.
Consider the case where an extra acre-foot of water would increase a farmer’s profits by $500, but it is worth $8,000 to a growing city. Without a market, the farmer would use all of the water on agriculture. However, a market would allow the farmer to trade water to the city for money. At any price between $500 and $8,000, both would benefit. Yet under the current system, many beneficial trades do not occur, because there are only limited regional markets (such as the Colorado-Big Thompson Project and the emergency California Water Bank). In most of the West, working markets do not even exist. That’s why the federal government should establish a comprehensive water market.
As the West gets warmer and drier, a transfer of water from agricultural to urban use is going to happen somehow--and this is the most efficient way to do it.