Ag to Urban

This paper [PDF] uses a simulation to calculate the value of "perfect" water markets in SoCal. Value is expressed as the increase in welfare that results from a decrease in scarcity costs.*

The authors conclude that:

Several promising long-term and short-term water transfer opportunities exist within southern California. The most promising southern California transfers remain from agricultural regions on the Colorado River to urban regions nearer the coast.

Small reallocations of water, represented as market outcomes in this paper, can substantially reduce regional shortage costs. An ideal southern California water market decreases average agricultural deliveries by 460 taf/year (a 13% reduction), but decreases regionwide average annual scarcity costs by 81%. These are upper-bound estimates for the value of an ideal market.

As you might expect, IID is the source of most of this water. What's interesting is that IID is "only" selling 300TAFY, which is about 10 percent of its water allocation.

Another interesting point is that the biggest reductions in scarcity costs are in Castaic and Antelope Valley. When the paper was written (about 2000), these areas were growing rapidly but facing water constraints. Although growth has probably slowed, current wrangling over water in Antelope probably reflects continuing problems with water scarcity.

So what's the price of water in these "perfect" markets? It's hard to say from the paper (darn!), but the simulation indicates that an additional AF of water is worth $1,338 to MWD in extreme drought years and an average of $643 across all years. (These "scarcity" values do NOT include MWD's delivery or treatment costs, which are about $800/AF today...)

Bottom Line: The transfer of a small share of agricultural water can alleviate almost all urban water scarcity.** With fully developed water markets, farmers will stay in business and urbanites can take longer showers.

* When water is sold, payment from one party to another does not affect total welfare -- like moving money from one pocket to another. What matters is the value of water in use, i.e., welfare increases if water moves from a lower-value use to a higher-value use.

** Given that farmers control 80 percent of California's developed water, a 25% reduction in their water supply (via market sales) would DOUBLE urban water supplies.