Implications of Climate Variability on Western Water Transactions

Abstract

Water markets in the western United States have emerged as declining water supplies and urban growth have created an increased pressure on existing resources. A two-stage least squares econometric model is estimated to examine the factors that influence water prices in the intermountain west. Results suggest that water prices are strongly influenced by demand factors and the characteristics of the water right. Econometric analysis indicates a significant relationship between the price of a water right and the quantity transferred, the year the transaction occurred, the percent change in population of an area, the new use of the water right, whether the transaction occurred during a drought year, and the location that the transaction occurred. The importance of climate variability in the intermountain west is suggested by the significance of the drought index. Increased water market activity will likely be a dominant strategy used to alleviate increased demand on water supplies.