Market Prices for Water in the Semiarid West of the United States

Market prices contain information about supply and demand, the institutions that influence both these elements, and the operation of the market. Prices also allocate scarce resources to higher-valued uses. In this paper we analyze the price history of three water markets in the arid Southwest: Arizona's Central Arizona Project, Colorado's Colorado Big Thompson Project, and New Mexico's Middle Rio Grande Conservancy District. Using water transfers over 11 years, we estimate a simultaneous system of market equations, one for price and the other for quantity demanded. Comparison of the institutional characteristics of each market reveals that Colorado's market is well developed, with many trades and rising prices that respond to market conditions, and New Mexico's market is developing well, with lower prices, but showing some response to supply and demand factors. Arizona's market is the least developed, with few trades and very low prices. Our empirical findings support our claim that markets are becoming more efficient in these regions despite the considerable institutional and historical impediments to the evolution of water markets.