California Water: Pricing the Externalities

Economists have a useful framework for thinking about effects of an economic transaction that extend beyond the actors involved in the transaction. They call them “externalities”. They can be good or bad (benefits/costs enjoyed/borne by those not involved), but mostly the conversation revolves around the bad ones. The good ones we tend to take for granted.

Imperial Valley, 1905

Imperial Valley, 1905

Externalities are one of the big problem areas in sorting out how to create useful water markets in the western United States, where ag-urban water transfers are seen as one of the primary solutions to water shortages. The archetypal externality is the tractor dealership. The farmer sells water to the city, a transaction advantageous to both, meaning both benefit. But the guy selling tractors will sell fewer of them as agricultural land is taken out of production.

In the case of the complex reallocation of water now underway, the reduction of flows of ag tail water from the Imperial Irrigation District to the Salton Sea creates an externality. Critics of the reduction, who are not part of the IID-urban water transfers, argue that they would be harmed by the transfers because the Salton Sea would become even more icky than it already is. The question is how one accommodates that concern.

A grassroots group called “Citizens for a Reliable Water Supply” filed a brief with the California courts earlier this year suggesting this solution:

It is the people who receive water from the Quantification Settlement Agreement who should pick up the tab for environmental impacts, says Citizens for a Reliable Water Supply.

Questions for my smart Inkstain readers:

  • Is the reduction of flows to the Salton Sea legitimately considered an externality associated with ag-urban water transactions?
  • If “yes”, who should pay the costs of that externality?
    • Water sellers?
    • Water buyers?
    • The people harmed by a shrinking Salton Sea?



  1. The Salton Sea is an artificial eco system. It was once natural, but exists currently because the Army Corps of Engineers made a mistake. When they built the All American Canal they let the full force of the Colorado River flow into an ancient lake bed and created the Salton Sea. Its only feed source currently is waste water and offsets. However, the Sea serves as a replacement for natural resources and wetlands destroyed largely due to that same irrigation project, and the widespread land developement up and down the coast. So, yes there is an externality here, caused not just by agriculture, but by use of land. As for those harmed, that would need to be defined. If the lake dries, where do the dust clouds go? That gives the answer on who pays ultimately. The answer should be all of us, but in a narrow court setting, it will be those who benefit in the short term. We should be looking for a political solution, but a legal one is necessary in its absence.

  2. The way I see it, even if there were no ag-urban transfers and all the contaminated runoff continued entering the sea, it still would not be enough to offset the high evaporation rate lowering the level of that body of water. It would just be a matter of time before the issues of polluted dust blowing off an expanding dried lakebed causing air pollution , increased concentration of salts and other contaminants in the remaining water, etc., would ultimately require more and more mitigation and presumably that would be the responsibility of the polluters, so it’s a bit disingenuous for them to claim some other group should pay mitigation costs of dealing with that. But finger-pointing as to which interest group should pay for it isn’t the answer.

    It’s really too bad the Salton Sink was (re)filled due to ag-related intervention of Colorado River flow in the first place, but now that it’s there, much of California (and more) has grown to depend on Imperial Valley agricultural products and on the sea being there. And water transfers from Imperial Valley to Southern California urban communities reduces demand on water imports from Northern California via the sensitive Delta.

    I think the burden of maintaining the sea in an acceptable state should be considered to be in the interest of all Californians.

  3. The modern-day Salton Sea was created during the initial diversion of water into the Imperial Valley 30+ years before the All-American Canal existed. Ag tailwater is a big portion of the current input, but not all. The municipal and industrial wastewater from Mexicali, Mexico (a city the size of Austin, TX or larger) also feeds the Sea, and the Whitewater River feeds the Sea as well.

    I’m not sure where you get the information about “contaminated runoff,” though, George. While the ag tailwater is certainly full of salts, it is relatively free of other contaminants – the Regional Water Quality Control Board sees to that. And while the wastewater from Mexicali used to be horrific, it has improved somewhat, and a number of projects north of the border improve the water quality significantly as it makes its way toward the sea.

    The problem with the dust on the dry seabed isn’t that it is “polluted” per se, it’s that the dust is so fine that it can cause serious lung problems if inhaled. So I’m not entirely sure who the “polluters” are that you are referring to.

    As to the original question, the sellers are not exactly eager and willing sellers, and the residents (the people harmed) are even less willing. If the sellers were benefiting so much, one would think they would have been a little more eager to sell. But this water is only being sold because the BoR held a loaded pistol to their heads, so to speak. To saddle them with Owens Valley-style dust storms and/or billions of dollars in mitigation (remember this is one of the poorest counties in the nation we’re talking about), seems a little like we’re adding insult to injury.

    (And considering that the Sea continued to exist for 100 years before any ag-urban transfers occurred, it stands to reason that the input is plenty to offset the rate of evaporation, so yes, the exposed seabed does appear to be a direct result of the transfers.)

  4. Although certainly John knows this, but for those of you reading comments, the Army Corps had nothing to do with the creation of the Salton Sea. That honor belongs to the California Development Company, a private enterprise that was irrigating the Imperial Valley at the turn of the century.

    The All American Canal was not built until the 1940s, long after the Salton Sea was formed.

  5. Impacts to the Salton Sea from ag-urban transfers in Imperial Valley are clearly an example of an externality, in that those costs are not borne by those parties to the transaction. If the sellers or buyers were forced to pay those costs (either by agreement, legislation, or otherwise) the costs would then be internalized and no longer be considered an externality.
    If those costs were to be borne by those actually harmed that would be a market failure. What typically happens is that the costs are imposed on a large, disinterested constituency – i.e. all the taxpayers of Calif. Then it’s considered a useful compromise that maximizes utility. Or at least that’s what the taxpayers are told.

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  7. Externalities: IID should pay the cost of the pollution (and cleanup) of the Salton Sea. They can fund it by selling water. That’s how buyers can be added to the mix, but note they are only about 300TAF into 3MAF, so that’s 90% to IID.

    I blogged this idea a few years ago:

    Feel free to copy and use them, with a little thank you to me 🙂

  8. @CRG My impression about contaminated runoff in the Salton Sea comes from reports like this:

    “The water that sustains the Sea is mostly irrigation runoff from Imperial Valley agricultural fields, which carry salt, selenium, phosphates and other nutrients.” –

    “irrigated crop land spanning 600,000 acres in the Imperial and Coachella valleys has flushed a steady stream of salts, pesticides, fertilizers and selenium into the sea…Farms that drain to the Salton Sea do not treat their waste water. Technologies are available to filter out many of the pollutants, but they are not employed.” –

  9. @George

    The Press-Enterprise article is about 20 years old, and a lot has changed since then. But one thing mentioned in the article hasn’t changed much:

    “Every acre-foot of Colorado River water contains one tone of dissolved salts and minerals. The material is leached from rocks during the river’s 1,400-mile journey from the Rocky Mountains.

    “Selenium, a sulfur-like element, comes from the Green River Valley in northern Utah, among other places where pockets of selenium-rich sedimentary soils prevail in the West.”

    So are the salts, selenium and minerals/nutrients the fault of Imperial Valley farmers, the fault of people farther upstream or the fault of geography?

    The phosphates do come from farm fields, but this (more current) article gives some information about that issue:

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