Who Gains When Water Runs Out? Welfare from Agriculture-to-Urban Water Rights Trading in the Western United States

Abstract

Growing water scarcity increases the need to understand how water markets can improve allocation across competing uses. This study develops a market simulation framework to assess the economic welfare implications of water trading in the western United States. The framework combines information on water rights, water use, and market prices with economic demand relationships to estimate potential gains from transfers between agricultural and urban users. Alternative scenarios examine how trading opportunities and water availability shape these gains and their distribution across regions. Sensitivity analysis evaluates how uncertainty in input data and behavioral parameters affects estimated outcomes. The analysis provides a basis for distinguishing opportunities for beneficial reallocation from outcomes that depend strongly on modeling assumptions. By linking regional water conditions to economic incentives, the project supports assessment of market design and highlights the importance of considering both aggregate efficiency and the distribution of benefits when evaluating alternative water management strategies.