The University of Chicago Magazine

Snaking through southwestern New Mexico, its banks crowded with willow groves, the Mimbres River has long provided water to local farms and ranches. Nine irrigation ditches supply water to 140 farms in the Mimbres Valley, feeding apple and pecan trees, grapevines, and other cash crops. Like much of the West, how-ever, the region is plagued by dry spells. In April the U.S. Drought Monitor estimated that roughly 70 percent of New Mexico was experiencing drought conditions. By mid-May stream flow on the Mimbres had dropped 27 percent below its seasonal average.

To conserve water in New Mexico’s Mimbres Valley, economist Don Coursey urges an open-market approach.

To protect the dwindling resource, the New Mexico Office of the State Engineer enlisted Harris School of Public Policy professor Don Coursey to rethink the way people use water. For much of his career, Coursey researched how markets influence behavior toward environmental resources, be they public beaches or endangered species. As a University of Arizona graduate student in the 1970s, he studied under Vernon Smith, a 2002 Nobel Prize winner whose economic experiments—in which participants lost or gained real money—helped develop markets for nontraditional goods like electricity. During the past four years Coursey has applied the same approach to water shortages in the West, writing several forthcoming articles and a book on the subject to be published by the environmental think tank Resources for the Future.

Historically considered a free commodity, water ownership in New Mexico is determined by a first-come, first-served policy that cedes water rights to the first individual who diverts stream or river resources for a purpose such as irrigation. Those who arrive later receive junior, or secondary, rights to siphon water, provided they don’t infringe on the amount allocated for the senior owner. It’s a system that leaves farmers with junior claims vulnerable during periods of drought; their operations could fall apart within a single growing season.

One solution, says Coursey, is to persuade senior-rights holders to curb their water consumption and sell the surplus to junior owners for profit. Under current laws, community members can’t exchange or sell water rights; Coursey’s market system would change that. Think of it like a lemonade stand, he says. “I have water. You want to buy it. We make a deal.” Based on market prices, owners would decide whether to keep the water to which they’re entitled or else lease or sell their rights on the open market.

“People are slowly but surely realizing the power of markets” to cope with scant environmental resources, says Coursey, whose past research includes evaluating the relative value people attach to environmental quality versus other public goods, such as education and safety. “Regulatory markets not only help you achieve your goals, but help you achieve them more efficiently.” To this end, Coursey and researchers at the University of New Mexico (UNM) have conducted economic experiments to predict how a water market would work. Using UNM undergraduate volunteers to represent farmers, city water officials, and environmental groups, the researchers track quantities traded and sale prices under differing conditions, such as average water supply or predicted drought.

Past studies have found that participants—who use a computer interface similar to online stock-trading sites—mirror real-life trading behavior. Based on these experiments and the needs of the community, Coursey will roll out a pilot water market in the Mimbres River Valley during the spring 2009 growing season. While some states like Colorado already have a market system in place, the Mimbres launch will mark the first time individuals can swap water rights in real time, just as investors buy and sell shares electronically on, say, the New York Stock Exchange. Owners may sell their water rights permanently or lease them for a fixed period, affording them season-to-season flexibility.

This “sports car–quick” model, says Coursey, requires an understanding of how water works. Because it evaporates, particularly in arid regions, real-time trades must factor in potential quantity losses during transit. Nearly 30 percent of the water flowing through the Rio Grande in northern New Mexico, for example, will evaporate by the time it reaches the Texas border more than 400 miles away. Furthermore, as a river flows downstream, groundwater—underground resources used for wells or other purposes—and surface water mix, potentially affecting other consumers not involved in the trade.

To account for such fluctuations, Coursey has teamed up with hydrologists from New Mexico’s Sandia National Laboratories who study water distribution and quality. Every time a trade occurs, a region-specific hydrological model will factor in the dynamics of local water movement, ensuring fair prices and minimizing third-party effects.

As with any stock exchange, participation in the Mimbres market is voluntary. “If you want to sit on your rear end and do the same thing that your great-grandfather did with the water, that’s fine,” says Coursey. Those who choose to buy and sell can boost their profits while also helping manage a scarce natural resource. “Greed,” he says, “leads to a water system that is much more efficient than a situation where trading isn’t allowed.” Such avarice is good news for Mimbres residents who otherwise might not have enough water to go around.