There’s never been a “call” on the Colorado River – a need to curtail use in order to meet Colorado Compact delivery obligations. But folks in Western Colorado are preparing for the possibility. Via John Orr’s Coyote Gulch (a Colorado (state) water blog), a release from the Colorado River District explains how it works:

[U]sers with pre-1922 rights would be compensated for entering into an agreement to offer their senior water rights that are exempt from compact administration to junior users who would otherwise be called out by compact delivery requirements. Junior water users, in turn, could “subscribe” to the bank as a sort of insurance policy in the event of a compact call on their water rights. The bank would serve as the administrator and clearing house for those with senior, pre-1992 water rights and those with junior rights needing an alternative source of water. Temporary use of senior rights by juniors would only be permitted if a compact call were in effect or imminent.

In his history of of American economic growth, Empire of Wealth, John Steele Gordon discusses the importance of the provision of clean municipal water supplies to the growing industrial cities of America’s east coast. The rich had cisterns, the poor hauled water from contaminated wells, and nobody had very much of the stuff. Indoor plumbing was, to its first users, a delight, and he describes the luxury of soaking in a tub without having to heat water on the stove. But did it come with a cost to our eternal souls? Gordon writes:

Boston, ever vigilant against the possibility that people might be enjoying themselves on the Sabbath, banned bathing on Sundays.

Emily Green yesterday detailed the story of Cadiz, the California company that wants to pump groundwater from the Mohave desert and sell it into Southern California’s coastal municipal and industrial market.

CALIFORNIA Governor Arnold Schwarzenegger has endorsed plans by private speculator Cadiz, Inc to tap Mojave ground water, reports the Los Angeles Business Journal. The Cadiz plan, according to a statement from the governor, “will sustainably recover more than one million acre feet of water that would otherwise be lost to evaporation and make it available to help provide a reliable source of water for Southern California.”

At first blush, this would seem like a sensible use of market mechanisms to deal with water problems – willing seller, willing buyer, price set, water delivered. But, in fact, Green’s analysis of the story illustrates two fundamental market failures.

The first is what the economists call “rent-seeking behavior” – the actions of private individuals to distort markets by persuading governments to act in a way that has the effect of subsidizing the action at hand. Cadiz, as Green argues, has this problem in spades, with close associates of the company’s owner placed in key positions throughout government in an apparent effort to influence government decisions favoring the project.

The second involves environmental externalities: side-effects of the project that are not captured in the water’s price:

[Q]uantity of water was also a challenge. In 2002, the Colorado River entered what the US Bureau of Reclamation river masters now call the worst drought of the last 100 years. There was no extra river water to bank in Cadiz’s private aquifer.

This left the option of pumping Mojave ground water water out from under Cadiz land and selling it to Metropolitan and its agencies. Except that so little water flows into the Mojave through rain and snowmelt every year, this option would mean swift collapse of delicate desert ecosystems.

In fact, markets work in relatively predictable ways. Absent intervention to prevent things like this, markets deliver failures like Cadiz with some regularity.