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Water banking, conjunctive administration, and drought: The interaction of water markets and prior appropriation in southeastern Idaho

Despite recognition of the potential economic benefits and increasing interest in developing marketing instruments, water markets have remained thin and slow to evolve due to high transactions costs, third party effects, and the persistence of historical institutions for water allocation. Water banks are a marketing instrument that can address these obstacles to trade, allowing irrigators within a region to exchange water in order to mitigate the short‐term effects of drought. Water banks coexist with the institutions governing water allocation, which implies that rule changes, such as adoption of a system of conjunctive surface water‐groundwater administration, carry implications for the economic impacts of banking. This paper assesses and compares the welfare and distributional outcomes for irrigators in the Eastern Snake River Plain of Idaho under a suite of water management and drought scenarios. We find that water banking can offset irrigators' profit losses during drought, but that its ability to do so depends on whether it facilitates trade across groundwater and surface water users. With conjunctive administration, a bank allowing trade by source realizes 22.23% of the maximum potential efficiency gains from trade during a severe drought, while a bank that allows trade across sources realizes 93.47% of the maximum potential gains. During drought, conjunctive administration redistributes welfare from groundwater to surface water producers, but banking across sources allows groundwater irrigators to recover 88.4% of the profits lost from drought at a cost of 2.2% of the profit earned by surface water irrigators.