Forecasting Future Market Values of Water Rights in New Mexico

In considering the economic future of the American Southwest, important questions to be addresses are the expected availability of water and the price at which that available water will be provided to the ultimate consumers.

Using several sources, Chapter 1 illustrates that the Southwest in general, and New Mexico Specifically will face what is called an “absolute scarcity” of water before the turn of the century. There are two alternatives with which to resolve this “absolute scarcity” — (i) using physical means to make more water available to the region under stress, or (ii) setting up a mechanism to resolve scarcity internall taking into consideration important objectives such as efficiency and/or equity. The first alternative has not been researched in depth, but the conclusion drawn is that such an alternative would be either extremely difficult to implement or would alleviate water scarcity only temporarily. The second alternative, the market mechanism, has been shown to be a practical soulution, and although somewhat rigid, consistent with the economist`s notion of efficiency.

Taking into consideration barriers to the first alternative and the practicality of the market mechanism in the second, the present and future fears concerning physical limitation of water will be transformed into an increasing awareness relating to price at which water will become available. The information that could be gathered regarding such a price, would promote further understanding for: small right holders, planning by large developments, the shift to new ground water sources, and special impact situations.

In Chapter 2, practicality of the market mechanism and rigidities associated with it are analyzed. This chapter discusses the actual process of transferring a right to a specific quantity of water. Several legal impediments to a smooth working market are also discussed. The rigidities of the legal system and lack of flow of public information are translated into monetary terms through transaction costs. These transaction costs and the variables affecting them are analyzed in Chapter 3. It is concluded that most of the transaction costs are indeed related to the lack of public information concerning these costs and can be explained by variables such as the price of a water right and existence of an adjudication decree.

Chapter 4 discusses the theoretical determinants that affect the price of water rights. To do so, a distinction is made between the price of water in one time period (flow) and the price of a given amount of water in perpetuity (stock). Some of the literature relating to demand for water as a flow are elaborated and are further used to project demand for water in perpetuity. These final demands for water in perpetuity are put into a simultaneous system to derive variables having an impact on the price of water in equilibrium. Chapter 5 uses a questionnaire to provide a data base to implement the model presented in Chapter 4. Prices for water rights in the future are forecasted for the Rio Grande Basin of New Mexico. The projected real prices for the Rio Grande in 1990 are about four times that of prices prevailing in 1975.

The adjustments in the present water allocation system are classified into two categories technical and institutional. These are analyzed in Chapter 6 along with a summary and conclusions reached in this research.

Project No. 3109-209