Cadillac Desert Revisited: Property Rights, Public Policy, And Water-Resource Depletion In The American West

Imperfect property rights and government subsidies are pervasive sources of inefficiency in water resource development in the American West. To alleviate central Arizona's dependence on groundwater, the federal government subsidized construction of the Central Arizona Project to import up to 1.287 million acre-feet of water per year from the Colorado River. In return for the subsidy, Arizona groundwater law was reformed to eliminate the common-property pumping of groundwater and to ban groundwater mining after the year 2025. We build a model of Arizona's water problem to quantify the welfare effects of alternative CAP construction dates and Arizona groundwater laws. We reach two general conclusions. First, properly timed, CAP would have increased social surplus by a modest $69 million compared to the situation where central Arizona had no access to Colorado River water and extracted its groundwater eficiently. However, because of the federal subsidies, Arizona successfully pressed for early construction of CAP. CAP was thus completed 71 years too early, in 1987, at a deadweight loss of $1.323 billion relative to optimal timing. Ironically, construction in 1987 yielded lower surplus than never constructing CAP. Second, the explicit political exchange of state groundwater reform for federal subsidies and sub-optimal timing introduced a greater loss ($1.323 billion) than it corrected ($0.988 billion). Thus, this political exchange---which was initiated as a new federal policy---was worse than doing nothing at all.