Water transfers, agriculture, and groundwater management: a dynamic economic analysis

Water transfers from agricultural to urban and environmental uses will likely become increasingly common worldwide. Many agricultural areas rely heavily on underlying groundwater aquifers. Out-of-basin surface water transfers will increase aquifer withdrawals while reducing recharge, thereby altering the evolution of the agricultural production/groundwater aquifer system over time. An empirical analysis is conducted for a representative region in California. Transfers via involuntary surface water cutbacks tilt the extraction schedule and lower water table levels and net benefits over time. The effects are large for the water table but more modest for the other variables. Break-even prices are calculated for voluntary quantity contract transfers at the district level. These prices differ considerably from what might be calculated under a static analysis which ignores water table dynamics. Canal-lining implies that districts may gain in the short-run but lose over time if all the reduction in conveyance losses is transferred outside the district. Water markets imply an evolving quantity of exported flows over time and a reduction in basin net benefits under common property usage. Most aquifers underlying major agricultural regions are currently unregulated. Out-of-basin surface water transfers increase stress on the aquifer and management benefits can increase substantially in percentage terms but overall continue to remain small. Conversely, we find that economically efficient management can mitigate some of the adverse consequences of transfers, but not in many circumstances or by much. Management significantly reduced the water table impacts of cutbacks but not annual net benefit impacts. Neither the break-even prices nor the canal-lining impacts were altered by much. The most significant difference is that regional water users gain from water markets under efficient management.