NCPA - National Center for Policy Analysis

Establishing Markets Can Solve Water Problems

May 7, 1999

Water allocation problems have been the driving force behind the recognition of the value of free market environmentalism during the past decade, according to economist Terry L. Anderson.

Economists say subsidized construction of dams and irrigation canals, below market pricing and insecure drawing rights cause water resources to be used inefficiently. For example,

  • The Central Utah Project charges farmers $8 per acre foot, and the value added by farming is $30 per acre foot, but the cost to taxpayers is $300 per acre foot.
  • Santa Barbara, Calif., decided to build a desalination plant to produce potable water at $1,600 per acre foot, while California farmers use water to irrigate crops worth less than $100 per acre foot.
  • And while Arizona uses only about half of it water allocation from the Colorado River basin -- despite subsidized prices -- California and Nevada take all their allocation and more.

Environmentalists say dams create barriers to migratory fish, and when too much water is drawn from rivers, reduced instream flows destroy water habitats.

The free market solution is to create water markets where water rights can be sold to those who place a higher value on alternative uses -- such as environmental enhancement.

  • Thus the Environmental Defense Fund has promoted water markets in California.
  • The Nature Conservancy has branched off from its efforts to protect land through private ownership and conservation easements to establish easements for instream flows.
  • And the Oregon Water Trust is leasing water from agricultural users to increase stream flows for spawning salmon and steelhead trout.

In the Pacific Northwest, enhanced water flows can make hydroelectric power generation more efficient -- at a market value two to 10 times greater than the water's agricultural uses. Thus power companies are willing to pay farmers for water rights that also benefit the environment.

Source: Terry L. Anderson (Political Economy Research Center), "The Rising Tide of Water Markets," Journal des Economistes et des Etudes Humaines, December 1998.


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