2006 PRESIDENTIAL ADDRESS WATER MARKETS IN THE WEST: PRICES, TRADING, AND CONTRACTUAL FORMS

Abstract

Rising urban and environmental demand for water has created growing pressure to reallocate water from traditional agricultural uses. The evolution of water markets has been more complicated than those for other resources. In this paper, we first explain these differences by examining water rights and regulatory issues. Second, we place our research in the context of the economics literature on water marketing. Third, we present new, comprehensive data on prices and the extent, nature, and timing of water transfers across 12 western states from 1987 to 2005. We find that prices are higher for agriculture‐to‐urban trades versus within‐agriculture trades, in part, reflecting the differences in marginal values between the two uses. Prices for urban use are also growing relative to agricultural use. Markets are responding in that the number of agriculture‐to‐urban transactions is rising, whereas the number of agriculture‐to‐agriculture transfers is not. Further, there is a shift from using short‐term leases to using multiyear leases of water and permanent sales of water rights. This pattern underscores the need to consider the amounts of water obligated over time rather than examining only annual flows in assessing the quantities of water traded as is the common practice in the literature. Considering water obligated over time, termed committed water, we find significantly more is transferred and the direction of trading is different than if the focus is on annual flows. Finally, the data reveal considerable variation in water trading across the states. (JEL Q2, N5, L5, K3)