WATER SECURITYFor the Colorado River and Beyond, a New Market Could Save the Day
The Colorado River, “the lifeblood of the West,” is in trouble. Decades of overuse and drought have sharply reduced its water supply, threatening an ecosystem that supports 40 million people and 5.5 million acres of farmland. Stanford economist Paul Milgrom won a Nobel Prize in part for his role in enabling today’s mobile world. Now he’s tackling a different 21st century challenge: water scarcity.
The Colorado River, “the lifeblood of the West,” is in trouble. Decades of overuse and drought have sharply reduced its water supply, threatening an ecosystem that supports 40 million people and 5.5 million acres of farmland in nearby states and parts of northern Mexico.
Steep cutbacks in water use are critical. But the seven states that rely on the Colorado River can’t agree on how much less each of them needs to take over the long run, in large part because it’s not entirely clear who holds what legal rights to the river and who should get priority over others to its available water. If the states can’t agree, the federal government is reportedly threatening to make the hard choices for them.
Paul Milgrom, a senior fellow at the Stanford Institute for Economic Policy Research (SIEPR), has encountered intractable problems like this before. In 2020, he won the Nobel Prize in Economic Sciences for his pioneering work creating markets for goods and services that can’t be sold in traditional ways.
Water management, he says, is ripe for a market fix — not just for the Colorado River Basin but around the world as water shortages, made worse by climate change, become a defining issue of the 21st century. It’s no longer enough to leave decisions around water use up to federal, state, and local governments alone.
“We are trying to meet a 21st century set of challenges with 20th century technology and 19th century laws,” says Milgrom, the Shirley R. and Leonard W. Ely, Jr. Professor in Humanities and Sciences in Stanford’s Department of Economics in the School of Humanities and Sciences. “What we have, fundamentally, is a market design problem.”
Milgrom is part of an interdisciplinary Stanford team — led by Billy Ferguson, a PhD student in economics at the GSB and a former SIEPR undergraduate research fellow — that has developed an elaborate plan for how new markets for trading water could overcome key policy challenges around water allocation while providing incentives to high-volume users to find ways to do more with less.
Milgrom and Ferguson recently highlighted their proposal in a working paper released by the National Bureau of Economic Research. Their use case is California, one of the Colorado River Basin’s biggest stakeholders and whose system for divvying up surface water, which comes from rivers and streams, is especially complex and opaque.
