Left in the Dust? Pecuniary and Environmental Externalities in Water Markets

Speaker:  A/Prof Sherzod Akhundjanov

Affiliaiton: Utah State University

Location: Room 215, Chamberlain Building (#35), St Lucia Campus

Abstract: In the world’s arid and semi-arid regions, up to 85% of freshwater consumption is attributed to agriculture. Growing urban populations and shifting precipitation patterns driven by climate change create market incentives to transfer some agricultural water to urban uses. Economic analyses consistently suggest that such reallocations yield substantial gains from trade. However, the use of markets to reallocate water in arid regions has drawn political criticism due to its potential to reduce agricultural output and cause negative environmental effects. In this study, we first develop a general equilibrium model to formalize arguments on how liberalizing water trade generates pecuniary and environmental externalities, and then test the model’s predictions using synthetic control and difference-in-differences analyses of the largest rural-to-urban water transfer in the United States: the sale of agricultural irrigation water from Imperial County to urban use in San Diego County, California. Our findings reveal declines in agricultural production and employment, a widening skilled-unskilled wage gap, and increased dust pollution in the water-exporting region following the transfer. The increased intensity of agricultural water use after the transfer exacerbated the desiccation of the Salton Sea---a large saline lake in the region---exposing fine-silted lakebed and raising particulate concentrations (PM2.5 and PM10). Back-of-the-envelope calculations suggest that the health costs of increased PM2.5 levels are rising and disproportionately borne by populations who do not benefit from the water transfer. This work informs policies related to climate adaptation, highlighting their potential economic, environmental, and health impacts.