Economics of Water Trading in Consumptive Use

The economics of water trading in consumptive use has often overlooked the conservation incentives inherent in such trading when institutional rules like prior appropriation govern allocation of water. Utilizing an analytical framework of water trading between two irrigation water users employing irrigation techniques of similar efficiency, the study demonstrates how trade in consumptive use of water reduces incentives for greater diversion by users with prior claims to water, as compared with trade in water diverted. It also shows that such transfer increases the marginal value of water use for those users with junior (priority) claims to water rights. In addition, it explores the applicability of METRIC as a recent innovation in measuring consumptive water use at the field level, lowering the costs of water trading at a smaller spatial scale.