Water scarcity presents an obstacle to economic development in the western United States. In an attempt to accommodate the increasing levels of demand that population growth, recreation, industry, and environmental protection place on water supplies, western states frequently establish markets for water. Water markets promote efficient allocation, helping states to derive the highest possible economic benefit from available resources, and allowing western water supplies to support as much new development and population growth as possible. However, imperfect pricing information for water threatens the ability of water markets to efficiently allocate water. Correct valuation improves water right allocation by aiding market participants in negotiating and completing sensible transactions despite the limited availability of price signals. This project will estimate the values market participants place on shares of ditch company water rights in Colorado's South Platte basin. Based on observed market activity, the hedonic will method will be used to estimate the implicit value consumers place on each characteristic of a water right, and the contribution of each characteristic to the water right's price. The dataset analyzed in this project includes price, quantity, reliability, location, and type of use information for 254 transfers of ditch company shares. Because these data are proprietary and difficult to collect, this dataset represents one of the most comprehensive collections of water transaction information in existence for Colorado's South Platte basin. It is predicted that the ordinary least squares estimation of the hedonic price model developed in this project will reveal that reliable water supplies located near municipalities attract higher prices than variable water supplies situated downstream from cities. In addition, economies of scale and water price appreciation are predicted to exist in the South Platte basin.
Water markets in the western United States have expanded over the last 40 years driven by two forces – population growth in the West and Southwest and limited development of new storage projects. Until 2008 house prices, home construction and population growth appeared to be locked in an ever-increasing upward trend. With little historical experience to the contrary, water market prices similarly appeared to be driven by real estate development. The collapse of the housing market in the last three years provides an opportunity to examine the connection between the real estate and water markets.
Water scarcity presents an obstacle to economic development in the western United States. Water right markets promote efficient allocation, helping states to derive the highest possible economic benefit from available resources, and allowing western water supplies to support new development and population growth. However, uncertainty surrounding water right market values threatens the ability of water markets to efficiently allocate water. To address this problem, we employ econometric analysis techniques to estimate the values market participants place on shares of ditch company water rights in Colorado’s South Platte basin. Our analysis demonstrates that ditch company share buyers value proximity, reliability, and flexibility.
