Improving the ability of a water market to efficiently manage drought

Abstract

Some water markets maintain institutional elements that provide allocative advantages to specified water users. In the Lower Rio Grande Valley, water rights are designated as either municipal or agricultural (irrigation), with certain prioritization advantages afforded to municipal accounts. While sales of rights between municipalities and irrigators are allowed, the priority disparity results in a prohibition on leasing between sectors. Concern over meeting future urban demand has led municipalities to purchase rights well in excess of current needs. The inability to lease municipal water to irrigators removes a significant and growing fraction of available water from the market. The additional flexibility provided by leasing provides a valuable tool for managing seasonal drought. In this analysis the justification for prioritized municipal water is investigated. Results indicate that the added security municipalities may derive from higher prioritization during drought is accompanied by economic inefficiencies in regional water allocation. It is argued that eliminating municipal protection and the consequent allowance of intersectoral leasing would contribute to regional well‐being at small cost to municipal water users.