|Lake Powell (source)|
The more one learns about water in the West, the farther one falls into the rabbit hole. While China introduces capitalism into its countryside, the rural western United States remains firmly entrenched in what looks an awful lot like a command economy. . . .
Water in the West is simply too cheap: Its low price doesn't reflect its scarcity or its external costs to society. . . . Water in the West, where the resources is rare, has historically cost users less than in the East, where water is relatively abundant.
This is from Dam Nation by Stephen Grace (pp. 207, 216). Water management in the West is an ongoing disaster. Obviously water presents some very difficult policy challenges: the usual problems with the commons, intertemporal (even intergenerational) allocation of uncertain endowment streams, political economy, imperfect enforceability of contracts, etc. are all present. But many of the policy interventions effected during the last century have exacerbated these problems rather than targeting and correcting market failures. The rural West's culture of rugged individualism is sustained in large part by massive taxpayer funding of water storage and allocation. Probably Western agriculture and other activities would control a much smaller allocation of resources if the Social Planner were running the show (and certainly if markets were running it). I say this despite my own hereditary and cultural sympathies for the rural West.
There is also this:
When farms and ranches sell their water rights to growing metropolitan areas, local food production decreases. The biggest losers in the transfer of water from farms to cities, aside from the rural communities that wither and die . . . , are urban locavores who want to eat fresh food grown nearby. A city can quench its thirst today with the water rights of farmers, but what of its hunger tomorrow? (208)
I think Grace is too sympathetic to this particular interest group (locavores). I wrote a bit about the urban/rural water split here.