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Water Markets Water Markets and Water Allocationand Water Allocation
Wednesday, March 29Wednesday, March 29
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Owner of surface land rights has right to Owner of surface land rights has right to reasonable use of water withdrawn from reasonable use of water withdrawn from her wellsher wells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 decrease 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=MB
Demand for water in rural uses
MNB = MB - MC
MNBr
Water
$
Du
Demand for water in urban uses
MNB = MB - MC
MNBu
$
Urban water use Rural water use
MNBu
MNBr
Efficient allocation of water: where MNBr = MNBu
$
Urban water use Rural water use
MNBu
MNBr
$
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