Thumbnail of Economic Principles

In the Ground Water Banking Project, we will look at the economics issues of the status quo and the potential changes in economic considerations associated with various accounting alternatives.

• Market Failures keep resources from moving to the uses most wanted by society. This can result shortage (or surplus), waste and conflict. "Externalities" and "The Tragedy of the Commons" are two ways to think about Market Failures. The project will explore whether ground-water banking may provide a mechanism to address some externalities, and whether the principle of the tragedy of the commons suggests that banking and market mechanisms alone may not move enough water to environmental needs.

• Externalities are when someone's economic activity injures (or benefits) a third party who does not participate in the decision making process. Suppose Ms. A undertakes recharge to increase flow to her own spring. The flooding of Mr. B's basement and the immediate reduction of power generation are negative externalities. The increase in flows to Ms. C's spring, and (perhaps) delayed power generation at a time of higher demand are positive externalities.
• If a water-banking system lets Ms. A pay for the negative impacts, and receive compensation for the positive impacts, then these impacts are internalized to Ms. A and her decisions are now based on all the costs and benefits to society.
• The tragedy of the commons occurs when nearly all the benefit of an activity is an externality. If a wetland has adequate water to support wildlife, everyone has an opportunity to enjoy it. But Mr. D can enjoy the wetland whether or not he dedicates water to it. And if he does, he can't exclude Ms. E nor compel her to help pay. It is not rational for Mr. D (nor any other individual) to dedicate water to the wetland, even though society wants a vibrant wetland.
• Transaction Costs. When a transfer is proposed that would move water to a higher-value use (or a new use), the applicant has to pay application fees, provide analyses and documentation, and wait for administrative processing. These transaction costs are in addition to the cost of obtaining the water right. Transaction costs affect decisions and economic activity. In the Ground Water Banking Project, we will look at current transaction costs and consider the changes in transaction costs that would accompany various accounting alternatives.

• Induced Behaviors. Policy decisions sometimes result in undesired behavior and results. The water-right forfeiture statute occasionally results in irrigation that has no real economic purpose, when that water could provide social benefit if applied elsewhere. Strong incentives to deliver water downstream (or line canals) could reduce recharge from irrigation and therefore spring flows, inadvertently compromising mid-Snake water quality. The Ground Water Banking Project will consider unintended consequences that could be invited by different banking systems.

• Pricing Mechanisms. Some current water accounting systems track only volumes of water. Any sales, and the price at which water trades, are private transactions outside the accounting system. Other current systems have an administratively determined price. Still others use a trading floor or auction format where bidding sets the price. The Ground Water Banking Project will study the economic and environmental implications of various pricing options.

Economic analysis for the Ground Water Banking Project will be performed by the Boise Valley Water Use Study. This is a cooperative study between the US Bureau of Recalmation, the Idaho Department of Water Resources, and the University of Idaho.

Economic interests potentially affected by ground-water banking:

• aquaculture
• cities
• hydropower
• industry
• irrigated agriculture
• recreation and tourism