Economic impact of alternative policy responses to prolongedand severe drought in the Rio Grande BasinJames F. BookerDepartment of Economics, Siena College, Loudonville, New York, USAAri M. MichelsenEl Paso Agricultural Research Center, Texas A&M University, El Paso, Texas, USAFrank A. WardDepartment of Agricultural Economics and Agricultural Business, New Mexico State University, Las Cruces, New Mexico,USAReceived 10 July 2004; revised 15 November 2004; accepted 7 December 2005; published 23 February 2005.[1] In the Rio Grande Basin, water is overallocated, demands are growing, andriver flows and uses are vulnerable to drought and climate change. Currently, the basinis in the third year of severe drought; irrigation and municipal water diversions havebeen severely curtailed; extensive diversions threaten endangered species, and reservoirvolumes are nearly depleted. A central challenge is development of policies thatefficiently and equitably allocate the basin’s water resources among competing usesacross political and institutional jurisdictions. A basin-wide, nonlinear programmingmodel optimizes resource allocations and water use levels for the upper part of theRio Grande Basin to test whether institutional adjustments can reduce damages causedby drought. Compared to existing institutions, we find that future drought damagescould be reduced by 20 and 33% per year through intracompact and interstate watermarkets, respectively, that would allow water transfers across water managementjurisdictions. Results reveal economic tradeoffs among water uses, regions, and droughtcontrol strategies.Citation: Booker, J. F., A. M. Michelsen, and F. A. Ward (2005), Economic impact of alternative policy responses to prolonged andsevere drought in the Rio Grande Basin, Water Resour. Res., 41, W02026, doi:10.1029/2004WR003486.1. Introduction[2] In most of the western United States, existing watersupplies are claimed and diverted largely for irrigation andgrowing municipal and industrial demands. Remainingflows are increasingly protected for in-stream flows andenvironmental purposes. Most easily accessible groundwa-ter is developed or is depletable. Throughout the region,drought and climate change aggravate the increasing com-petition for water. With increasing demands, incidents ofdrought will have increasingly serious impacts [Young,1995], and the choice of water allocation policies willbecome particularly critical.[3] The United States federal government recently iden-tified the Upper Rio Grande as among river basins havingthe highest potential for conflict and crisis, especially indrought conditions [U.S. Department of Interior, 2003]. TheRio Grande exemplifies the problems faced by many aridregions (e.g., Colorado, USA; Yellow, China; Jordan, Mid-dle East; Murray-Darling, Australia; and Nile, Africa) inwhich water is overallocated, there are growing competingdemands, and river flows and uses are vulnerable to droughtand climate change. These factors have highlighted theinterest by policymakers, scientists, and water managers toexamine systematically water management alternatives.[4] A central challenge is the development of policies thatcomplement existing water management institutions andwhich allocate water resources efficiently and equitablyduring drought. This requires approaches that encompasshydrologic river basins, political and institutional bound-aries, and which cover a range of economic impacts. In thiswork we focus on the impacts of transfers resulting fromwater markets as one approach to reducing the economicdamages from drought. Market-based transfers have beensuggested as one response to coping with scarce suppliesand limited storage [e.g., Vaux and Howitt, 1984], particu-larly during drought.[5] In previous research, integrated hydrologic-economicmodels at the basin scale have focused on the economicimpacts of transfers under typical supply conditions [e.g.,Oamek, 1990]. Other work developed extensions to man-aging water quality [Lee et al., 1993] and incorporatedadditional nonconsumptive use values [Booker and Young,1994]. Under drought conditions, the impacts of severalmarket institutions were estimated by Booker [1995]. At thesubbasin scale, integrated modeling of economic impacts ofwater transfers for protecting in-stream flows was devel-Copyright 2005 by the American Geophysical Union.0043-1397/05/2004WR003486$09.00W02026WATER RESOURCES RESEARCH, VOL. 41, W02026, doi:10.1029/2004WR003486, 20051of15For non-commercial and educational use only. Please ask publisher for use permissionoped by Hamilton et al. [1999] and by Willis and Whittlesey[1998]; impacts of w ater markets for protecting waterquality were examined by Weinberg et al. [1993].[6] Despite these circumstances facing the basin and thecontributions of this previous work, little comprehensiveanalysis of drought and its impact in the basin has beenconducted to date. With increasing demands on the basin’swater resources, droughts will have growing economic andenvironmental impacts, and the choice of drought-copingpolicies will take on increasing importance to the region.This paper’s objective is to take a first step toward com-prehensive analysis of drought and its impact to the basin bycomparing current institutions that govern the allocation anduse of t he basin’s water during drought periods withalternative designs. This objective is accomplished throughthe development and application of a comprehensive basin-wide nonlinear programming mode l of the hydro logy,economics, and institutions in the Rio Grande. The modelis applied to evaluate the hydrologic and economic effec-tiveness of selected potential drought-coping policies.[7] In this research we provide an example of mitigatingeconomic impacts of drought through market-based watertransfers in a region containing complex institutions andhydrology, the upper part of the Rio Grande Basin (seeFigure 1). We extend previous work by developing anintegrated hydrologic-economic model at the basin scalethat incorporates ground and surface water interactions andtracks hydrologic and economic relationships over severaltime periods. We apply the model to estimate impacts ofcoping with drought through market-based water transfers.[8] The remainder of the paper is organized as follows:First, the physical and institutional context of water use andallocation in the basin are summarized. Then, we analyzethe current ‘‘law of the river’’ water allocations and