Towards a Market Solution to Water Shortage: The Case of Lower Rio Grande Valley

A well-defined market for tradable water rights can achieve allocative and productive efficiency. Allocative efficiency refers to water allocation to highest valued use, while productive efficiency allows for water conservation since conserved water can be sold in the market (McCann and Garrick, 2014). The issues surrounding water requirements in the Lower Rio Grande Valley in South Texas include rising water demand and falling supply levels from frequent droughts and under deliveries by Mexico. A probability distribution for water deliveries in the next delivery cycle (2021-2025) is developed using a multivariate time series model. Based on the model, it is highly likely that Mexico will under deliver in the next cycle. Consequently, a market solution called the Dry Year Option Program (DYOP) is proposed as a near-term solution while making gradual efforts to revise the delivery mechanism, and improve irrigation efficiency. DYOP will involve temporary “transfer” of water rights from agriculture to urban water users. The farmers, in turn, will receive payments per acre-feet of water right enrolled in the program. These payments equal the value of irrigation water, calculated using the Residual Imputation Method. The program will ensure water security for urban water users while helping farmers to minimize losses.