Risk Management Instruments for Water Reallocations

Chad E. Hart
February 2005  [05-BP 46]

Federal and state governments are searching for programs and/or policies to deal with the risks linked with uncertainty in water supplies and demands. Within the United States, competition among agricultural, urban, and environmental concerns for water is increasing. Drought conditions and water use restrictions have, at times, limited water supplies for these varied uses. The federal government stands in a unique position as both a major supplier and demander of water. As such, the federal government has put forward several programs for water conservation, information, and usage. One area in which the federal government has not made significant progress is the issue of risk management and compensation for water reallocations. When natural forces or government policies trigger water use restrictions, the restricted water users may or may not be compensated by current programs. This paper explores how current policies may or may not cover agricultural losses due to water use restrictions and outlines several government policy proposals and market-based methods to mitigate the risks from water restrictions. Given the diversity of the agents involved and the watersheds covered, it is likely that no one program will be the "best" program to address the issue. The "best" program for a given combination of agents in a watershed will depend upon the types of agents and the possible uses of the water.

Keywords: government policy, reallocation, risk management, water rights.

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