Author Posting. © Western Economic Association International 1994. This is the author's version of the work. It is posted here by permission of Blackwell Publishing for personal use, not for redistribution. The definitive version was published in Contemporary Economic Policy, Volume 12, Issue 1, January 1, 1994, pages 122-133.
NOTE: At the time of publication, the author Neal MacDougall was not yet affiliated with Cal Poly.
The definitive version is available at https://doi.org/10.1111/j.1467-8276.2005.00722.x.
Existing institutions allocating water in California reflect prior appropriation water rights established when water was abundant. These allocation rules queue users and do not encourage water conservation. increased water scarcity and growing valuation of water's environmental benefits are inducing a transition to water allocation mechanisms that increase water efficiency in agriculture. Transferable rights systems will lead to market-like water allocation, induce farmers to adopt water conservation technology, and may not face strong objection from senior water rights holders. One must weigh the efficiency gains associated with transition from water rights to water markets against the transaction costs associated with installing facilities that enable water exchange and trading. Transition to water markets may preserve the agricultural sector's well-being while allowing the transfer of some water outside of agriculture - in particular, for environmental benefit. The cost of policies proposed to reduce agricultural water supply while encouraging water trading are inversely related to the extent of trading allowed. The more farmers trade water, the less costly reducing water supply is to agriculture. Policies reducing water supply to Central Valley Project contractors and allowing trading only among these contractors are much more expensive than are policies encouraging trading among all agricultural water users in California.
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