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April 4, 2007
Semiconductors vs Alfalfa: Water Markets in the West
Absolutely fascinating new paper out looking at water markets, scarcity, and trading in the U.S. West. Recall that agriculture uses 80% of the water in the West, and pays a horribly skewed price, one that encourages much waste and misallocation. Consider: One acre-foot of water used in the semi industry in California generates $980,000 in a gross state revenue, while the same acre-foot used to grow corn and alfalfa generates $60.Here's more:
For example, in 1992, Ronald Griffin and Fred Boadu reported that the value of water used in agriculture, capitalized over 50 years, was $300 to $2,300 per acre-foot (af), (approximately 326,000 gallons) in the Rio Grande Valley of Texas. In contrast, urban water values, capitalized over the same period, ranged from $6,500 to $21,000 per acre-foot. Griffin and Boadu estimated that the average re-allocation of water produced net benefits of $10,000 . As pointed out by Hanemann (2005, note 29), this also is historically true for urban areas where metering did not become common until well into the 20th century.
For more contemporary evidence, in California, an acre-foot used in the semiconductor industry produces $980,000 in gross state revenue; that same acre-foot used to grow cotton and alfalfa generates $60. Groundwater for farming near Marana, Pima County, Arizona costs approximately $27 per acre-foot, whereas the same water supplied by Tucson Water, with an increasing block rate structure, will cost customers from $479 to $3,267 per acrefoot. In recent efforts to secure water from southeastern California’s Imperial Irrigation District (IID), San Diego offered $225 per acre-foot for water that IID farmers paid $15.50.5 Even more dramatically, IID farmers paid $13.50 per acre-foot in 2001, while a development near the South Rim of Grand Canyon National Park was prepared to spend $20,000 per acre-foot to deliver the same Colorado River water.
Although the costs of treating and distributing water for urban residents tend to be far greater than for rural and explain some of these price differences, the size of the differentials indicate the higher marginal benefits received by many urban versus rural users for water.
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Seth -- I don't think the author's intent was to suggest that it's a precise measure, at the margin, of the cost/benefit of substitution in two different factor applications. More that it gives you an order of magnitude impression of the differential value accorded to water in different applications, and, more importantly, the level of subsidy in water supply that makes agriculture in California's Central Valley, say, even have a semblance of making economic sense.
Thats a faulty comparison that you are making. One acre-foot of water in agriculture might make only $60 while in semiconductors that might make $1MM. However, even if decide to use all the available water in semiconductors, the marginal return due to this substitution will be less than $1MM because semiconductors will never need as much water as agriculture. Water is a crucial determinant of the viability of agriculture while is only one of the many crucial determinants in semiconductor manufacturing. Economics 101, really!