Wet Growth: Effects of Water Policies on Land Use in the American West

Faced with rapid population growth and the increasing cost of developing new water supplies, state and local governments throughout the American West have been instituting regulations that make approval of residential development conditional on adequacy of water supplies. Using original data on water adequacy policies, this paper examines the effects of these regulations on housing supply in Colorado and New Mexico over the past two decades. Fixed- and random-effects panel regressions indicate that county policies aimed at restricting groundwater basin mining in unincorporated areas have shifted some development toward cities. In some cases, they have also encouraged developers to build “off the grid,” taking advantage of a loophole that exempts domestic wells from the regular water rights permitting process. Meanwhile, Colorado cities’ aggressive use of impact fees to fund water supply expansion does not appear to have slowed or shifted growth. These findings suggest that price-based tools to ensure water availability are a preferred regulatory alternative to quantity restrictions. Closing the loophole on domestic wells is likely to be important in many western states to prevent uncontrolled mining of aquifers and the proliferation of septic systems.