Water, Water Everywhere, Waiting for a Market

Everyone—individuals, families, businesses, government—needs access to water. How best to allocate this natural resource? Usually, water access and use is regulated via government directives.

But more and more policy-makers are coming to recognize the wisdom of allowing the market

place to decide. This past summer, in a speech to western water officials in Boulder, Colorado, U.S. Secretary of the Interior Bruce Babbitt outlined a plan that would allow "water markets" to work hand-in-hand with environmental protection and conservation.

Many environmentalists hailed the speech as visionary. His staff calls it "the most important water speech of his tenure." Yet, few people seem to remember that Babbitt presented the same ideas in a Boulder speech nearly three years ago. At that time, he said the key to solving western water problems "lies in utilizing opportunities for careful cultivation of voluntary, 'willing buyer, willing seller' markets." Not much has happened since then.

In the West that I have always called home, actions speak louder than words. And Bruce Babbitt has failed on that count. It is easy to dust off old speeches. It's a lot harder to make things happen. The West is the fastest growing region in the nation and also the most arid. A solution to our water problems is nothing less than critical. And, as the secretary has pointed out twice now, a marketplace of people who resolve water issues with their own money moves us toward a solution.

The federal government claims that it wants to help. In 1988, the Bureau of Reclamation declared itself a "water market facilitator." The bureau even went so far as to come up with regulations for buying and selling federally supplied water. But these rules have been little help. "Market activity in federal water has not increased significantly," points out Terry Anderson and Pam Snyder, authors of "Water Markets: Priming the Invisible Pump."

It's time for the federal government to step aside and let the discipline of markets take over. The idea is simple. Allow federally supplied water to be traded among water users at whatever prices they may choose. That way people must take into account the true cost of water, rather than some federally subsidized price. When faced with real prices, people have all the incentive they need to conserve water. Take for example the city of Tucson, which reduced peak daily demands in the late 1970s by 20% simply by increasing water prices by as little as 10%.

In his most recent speech, Secretary Babbitt cited the deal in California between the Imperial Irrigation District, the city of San Diego and the Metropolitan Water District of Southern California as a shining example of how his agency is striving to make markets work. If completed, the deal would be the largest water transfer in the history of the West.

The secretary needs to choose his examples more carefully. This deal, at least nine years in the making and still not completed, is exactly the reason government should not tinker with markets. These groups are now looking for someone, namely the state of California or the federal government, to foot part of the bill for moving the water to San Diego. If they succeed in snaring a government partner, San Diego water users will not have to pay the real cost of their water it will be paid by all of those who do not choose to live in crowded, dry climates. Indeed, those of us who endure harsh Michigan weather—winters and all—should not have to subsidize the water demands of people choosing arid climates for health or wealth. Yet this is exactly what may happen.

Michigan residents enjoy the benefits of abundant fresh water thanks to the proximity of the Great Lakes. But they could benefit even more if they were not forced to subsidize water in the West. This is particularly troublesome given that Michigan's proximity to the Great Lakes has not afforded it dramatically cheaper access to water for personal and business consumption.

Ironically, water markets are already working with minimal federal involvement in the very state that the Interior Secretary seems to favor for making pronouncements about water.

Consider the water market of the Northern Colorado Water Conservation District where each year millions of gallons of water are traded through private, voluntary transactions. The water for the district is provided through Bureau of Reclamation projects. However, the federal agency has had little involvement with water transfers in the district. The result has been the creation of one of the most widely known and best developed water markets in the West, if not the world. During the last few years, the market has grown considerably providing a reliable source of water for farmers as well as thirsty residents of Denver and Ft. Collins. One of the main reasons for the active trading is that water may be bought and sold with a minimum of red tape.

Other water markets are forming as well. Westlands Irrigation District in California has an electronic trading board where farmers buy and sell water. In Utah and Nevada, residential building booms have given rise to active markets as well. In those states, developers are buying water and paying its full price to make sure that new homes have an adequate supply. Oregon has even developed a lively market for water intended for environmental needs. In that state, a private environmental organization is paying farmers to use less water for irrigation and leave more water in the rivers to help protect endangered salmon.

Markets provide precisely the type of discipline needed to manage scarce Western water resources. The water problems throughout the region will be solved only through rational economic decisions prompted by real market prices—something water users have not faced in the past. "Subsidized prices create an insatiable demand for water and encourage inefficient uses," say Anderson and Snyder. Babbitt must realize that the West will never see real prices if the federal government continues to muck up true water markets with an endless flow of cash.

Michigan residents enjoy the benefits of abundant fresh water thanks to the proximity of the Great Lakes. But they could benefit even more if they were not forced to subsidize water in the West.