Focus on Research: “Emerging Markets in Water”, by Carey and Sunding

Economists have much to contribute to current debates over water policy.  Unfortunately, some of our very good ideas can get lost in translation when laypersons try to make heads or tails of academic studies.  In this new feature of this blog, I summarize a well-done academic study in terms that laypersons can (hopefully!) understand.  My hope is that these occasional summaries will contribute to a better public understanding of economic research.

The inaugural academic study I have chosen for this new feature is Emerging Markets in Water, by economists Janis Carey and David Sunding, which appeared in the Natural Resources Journal in 2001.  This article is a comparative study of water markets in California and Colorado.  Water markets are a topic of keen interest to many water economists, because they seem to hold out the hope of dramatically improved water use efficiency.  The basic question addressed by Carey and Sunding is:  Why have water markets succeeded so well in Colorado and failed so miserably in California?

The short answer is historical happenstance.  The focus of the study is two water development projects: the Central Valley Project (CVP) in California, and the Colorado-Big Thompson (CBT) Project.  Both were Depression-era projects undertaken by the federal government to provide supplemental water supplies to areas that had previously been settled.  Both commenced delivery of water shortly after the end of World War II.  But from the very beginning, subtle differences were built into the operation of the projects, with the end result that the CVP has made it much more difficult to transfer water from one user to the next.

The analysis is rich and addresses a lot of different factors, so let me focus on one of the big differences between the two projects: the differential treatment of so-called return flows.

Consider Farmer Jones, who irrigates his fields using an allotment of water from one of these projects.  After being applied, the water must go somewhere; for example, into the local aquifer or as run-off into neighboring streams.  This left-over water is referred to as return flows, and it is water that is then available for others to use, such as Farmer Smith, who owns the farm downstream from Jones.

Now suppose Farmer Jones instead wants to take his allotment of project water and sell it to Farmer Brown, who lives in the next watershed.  If he does so, what happens to the return flows that Farmer Smith had previously enjoyed?  They disappear!  This means that a transfer from Jones to Brown would end up hurting Smith, if he had previously been relying on the return flows to irrigate his lands.

One big reason it is so difficult to transfer water under the CVP is the way that California treats return flows, from a legal standpoint.  California operates under the so-called no-injury rule, which prohibits changes in water rights that injure other legal users of the water.  This means that if a water transfer causes injury to downstream users, then it is not allowed.  Since return flows are extremely common, the no-injury rule may obstruct many water transfers in California.

By contrast, under the CBT, return flows are owned by the water district that receives water from the project.  This means that downstream users have no legal grounds to object to a transfer that might affect the return flows.  This seemingly small difference – who has the legal right to the return flows – has apparently made it much easier to transfer water in the CBT.

How did the CBT and CVP come to have these very different legal treatments of return flows?  Here is where history mattered a great deal.  The CBT involved sending water from the western slope of the Rocky Mountains to the eastern slope.  Because it was “new” water, it did not have to contend with pre-existing claims to the return flows from disgruntled eastern users, who were not deprived of anything they had enjoyed previously.  This made it politically easier for the water district to claim ownership of the return flows.

Carey and Sunding provide other reasons for why it is now so much easier to transfer water in the CBT than in the CVP.  These include: different water rights structures, different numbers of users contracting with the government agencies, and different policies regarding the size of farms eligible to receive water.  If you are interested in knowing more, I strongly encourage you to read the article itself.  But bottom line:  this article is an excellent illustration of how economists can meld economic analysis with historical and legal context in order to gain insights into important policy issues.  And for water economists, it is hard to think of policies that have attracted more recent attention than water markets.

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Mark Kanazawa

I am Wadsworth A. Williams Professor of Economics at Carleton College, Northfield, MN