How Markets Might Solve Colorado River Water Shortages

Ongoing drought in the Colorado Basin presents severe challenges for addressing water shortfalls. This region is one of the most rapidly growing in the country; has some of the country’s most valuable agricultural production and is known for exciting recreation opportunities and natural resource splendors.

The 1922 Colorado River Compact divided river flows among Arizona, California, Colorado, Nevada, New Mexico, Utah and Wyoming. Over time those divisions no longer address relative demand and supply and there is a need to reallocate and conserve water. The question is how to do that. Government mandates and financing are proposed as solutions. These are arbitrary, lack information on comparative values and costs, do not encourage compliance and create lobby pressure as well as political and bureaucratic incentives that have little tie to the value of water across different uses and locations. They are likely to be costly but unlikely to be successful.

Much more promising are arrangements that build on incentives to move and conserve water. These include encouraging water markets within and across states; compensating communities that will lose water and bear broad costs and encouraging tiered urban pricing whereby once basic water requirements are met with low prices, charges rise rapidly with increases in use. These arrangements promote water movement to its highest valued uses within and across states; reduce reliance on costly new infrastructure; compensate those areas that must give up traditional water uses and advance voluntary water conservation according to its values in urban areas. Only by enlisting the incentives of those directly involved in implementing needed changes in the supply and demand for water can the challenges facing the Colorado River Basin be addressed effectively.