Deviations from optimal pricing of Lower Colorado River water

While a water shortage will not develop immediately because Lake Mead in the Lower Basin and Lake Powell in the Upper Basin are both full, some further rationing scheme will have to be employed in the near future. This paper sets out a general model for the allocation of river water and discusses the inefficiencies in the current allocation system. Then, recognizing the difficulties involved in making second-best policy prescriptions, it suggests some ways that inefficiencies might be reduced without upsetting the delicate balance of property rights and income distributions associated with the use of that water. The paper is divided into three sections. First, an optimal pricing scheme for water is outlined and discussed. The second section identifies important ways in which current pricing schemes differ from the optimum. Finally, some policy changes are suggested.