California’s population is expected to increase by 15 million by 2020, straining the Golden State’s water supply. If the state is to avoid anticipated shortages, it must abandon policies that encourage waste and adopt policies that encourage conservation. The time to take such action is now.

According to the 1922 Colorado River Compact, allotments for use of the Colorado River are divided among seven states and Mexico. California currently uses approximately 5.2 million acre-feet per year, more than its 4.4 million acre-feet allotment. With demand increasing in Arizona, Colorado, and Nevada, Interior Secretary Bruce Babbitt has given California until September 1999 to devise a plan to eliminate the extra 800,000 acre-feet it presently uses. Water markets are the key to achieving this goal and would result in a more efficient system overall.

Allowing California to purchase or lease Colorado River water from other states would allow California to meet its urban and agricultural demands. This type of trading would also provide a legal means by which both irrigation districts and water wholesalers in other states could profit by leasing unused allocations of water.

Most of California’s Colorado River allotment goes to the Imperial Irrigation District (IID, with 2.8 million acre-feet) and the Metropolitan Water District (MWD, with 500,000 acre-feet). The MWD has spent $2 billion over the past decade to increase efficient water use in anticipation of rising demands. These high costs, however, are reflected in the price of MWD’s water.

The MWD currently sells water for $431 per acre-foot. On the other hand, agricultural water is extremely cheap. The IID sells water to farmers for $14 per acre-foot. Due to the enormous potential gains from trade, it makes more economic sense to trade than to spend $2 billion over ten years. In addition, price studies show that farmers are sensitive to changes in water price – increasing the price of agricultural water by 10 percent decreases demand by 20 percent. Therefore, slightly decreasing subsidies for agricultural water would affect agricultural water use.

Some agricultural communities fear that increasing the price of agricultural water would upset or even devastate their way of life. Yet experience shows otherwise – it would simply give them an incentive to use water more efficiently. Already many agricultural communities are making such changes, and as a result they are benefiting. Throughout the state, farmers are both using new technologies and planting high-value crops such as nuts, fruits, and vegetables that are less water intensive. As a result, California’s agricultural sector is more productive than ever.

The MWD is also making water efficiency improvements through conservation and recycling. Its 27 member agencies have reduced Southern California’s need for imported water by 710,000 acre-feet annually. For example, San Diego County uses 13 percent less water than it did a decade ago, despite a 10 percent increase in population growth.

Although these efforts should be commended, they will not be enough to meet rising demands. “Urban demand is going to grow, no matter how heroic the efforts to conserve,” says Greg Thomas of National Heritage, a nonprofit environmental consulting firm. “There is just so much you can squeeze out of the system.” But getting the most out of the system will not be achieved by the bureaucratic approaches of the past. Indeed, they are a major part of the problem.

Secretary Babbitt himself expressed support for markets when he told a group of Western water officials at a conference in Boulder, Colorado that water supply problems in the West are the result of allocation and distribution.

“There is sufficient developed water for today and for the future,” he said, “provided that we use it efficiently, and engage markets, modern science, and conservation.” Babbitt proposed solving these problems through increased conservation efforts, better development of water markets, and with underground storage.

The Colorado River contains more than enough water to meet current and future needs. If states and agencies engaged in the marketing of water, the perceived crisis over a shortage of Colorado River water would come to a close.

Elizabeth Fowler is a public policy fellow at the California-based Pacific Research Institute. She focuses on market-based environmental reform and privatization.