Addressing open access through environmental markets: California groundwater rights

About

Environmental markets are widely prescribed as an alternative to open-access regimes for natural resource management. The effectiveness of environmental markets, however, is predicated on a number of theoretical assumptions about market power, enforcement, and transaction costs, among other factors that may adversely affect environmental market performance. Given how pervasive these features are in practice, it is an empirical question whether net benefits are generated when an environmental market replaces an open-access regime, and if so, why.

We examined this question in the context of groundwater in southern California’s Mojave Desert, where we leveraged a natural experiment that allowed us to measure the gains from adopting property rights for groundwater in California.

Approach

In the early 1990s, a system of tradable groundwater rights was adopted for the Mojave aquifer, but when the property rights boundary was drawn, some overlying landowners were left out. This created two groups of landowners: one group with property rights to groundwater and another who continued to have unrestricted access to the aquifer. 

Rights holders are restricted in how much they can pump, but they can also sell their water to users who value it more - for example, Mojave rights holders could sell their shares to cities. Farmers without rights can pump unrestrictedly, but only to water crops on their land. To measure the net gain to landowners, we calculated the difference between land prices just inside the property rights boundary and prices just outside.

Key Findings

We found a substantial gain for rights holders and evidence that it comes from the opportunity to sell water to urban users. Our estimates indicate that the gain from the rights regime exceeds $477 million, corresponding to more than a 53% increase in value for rights holders.

Partners

This research was conducted in collaboration Dr. Andrew Ayres and funded by a grant through the UC Office of the President with additional support from the Property and Environment Research Center.