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This study extends and refines a previous model and provides estimates of the economic value of water shortages from shortfalls in Mexican deliveries to the U.S. In the process, we identify and evaluate a range of crop choices, appropriate irrigation technology use, water source substitution, and other mitigation strategies used by farmers to deal with water shortages. The effects of exogenous crop price and yield risk, as well as and other structural considerations are incorporated in deriving the marginal value of irrigation water for reference drought years. Results show that South Texas farmers react to risk by diversifying their crop mix, which in turn has implications for the imputed value of water and soil resources. The derived shadow price of water under 1998 conditions was larger than the average value of water used in previous estimates of damages from Mexican water treaty non-compliance. The higher estimated value of water and losses are driven in part by empirical evidence and the associated model conditions that producers are willing to pay high costs to protect their investment in orchards and perennial crops such as sugar cane and that hydrologic and institutional constraints severely limit access and transfers of water especially under shortage conditions. Assuming hypothetical Mexican inflows up to 500,000 ac-ft into the U.S. reservoirs in 1998, the shadow price of water at the farm gate would have declined from over $400 per ac-ft to below $100 per ac-ft.


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