Interjecting Economics into the Surface Water Dialogue Texas Water Journal, Volume 10, Number 1 texaswaterjournal.org An online, peer-reviewed journal published in cooperation with the Texas Water Resources Institute Volume 10 Number 1 | 2019 https://www.texaswaterjournal.org Editorial Board Todd H. Votteler, Ph.D. Editor-in-Chief Collaborative Water Resolution LLC Kathy A. Alexander, Ph.D. Gabriel Collins, J.D. Center for Energy Studies Baker Institute for Public Policy Robert L. Gulley, Ph.D. Robert E. Mace, Ph.D. Meadows Center for Water and the Environment Texas State University Ken A. Rainwater, Ph.D. Texas Tech University Volume 10, Number 1 2019 ISSN 2160-5319 texaswaterjournal.org THE TEXAS WATER JOURNAL is an online, peer-reviewed journal devoted to the timely consideration of Texas water resources management, research, and policy issues. The journal provides in-depth analysis of Texas water resources management and policies from a multidisciplinary perspective that integrates science, engineer-ing, law, planning, and other disciplines. It also provides updates on key state legislation and policy changes by Texas administrative agencies. For more information on TWJ as well as TWJ policies and submission guidelines, please visit texaswaterjournal.org. The Texas Water Journal is published in cooperation with the Texas Water Resources Institute, part of Texas A&M AgriLife Research, the Texas A&M AgriLife Extension Service, and the College of Agriculture and Life Sciences at Texas A&M University. Rosario Sanchez, Ph.D. Texas Water Resources Institute Managing Editor Kathy Wythe Texas Water Resources Institute Layout Editor Sarah Richardson Texas Water Resources Institute Staff Editors Chantal Cough-Schulze Texas Water Resources Institute Kristina J. Trevino, Ph.D. Trinity University Cover photo: Painted Bunting at Madla Park, Grey Forest, Texas. ©2018 Grace Hardy. As a 501(c)(3) nonprofit organization, the Texas Water Journal needs your support to provide Texas with an open-accessed, peer-reviewed publication that focuses on Texas water. Please consider donating. https://twj-ojs-tdl.tdl.org/twj/index.php/twj/support https://www.texaswaterjournal.org https://www.texaswaterjournal.org Texas Water Journal, Volume 10, Number 1 Texas Water Resources Institute Texas Water Journal Volume 10, Number 1, December 17, 2019 Pages 112-127 Abstract: This paper applies the conceptual lens of economic efficiency as a criterion by which to evaluate surface water in Texas. We identify two major problems. First, Texas has a water allocation problem limiting the ability to substitute groundwa- ter for surface water to move water between river basins and to facilitate transfers within a river basin. Second, surface water is both underpriced and unresponsive to drought conditions preventing it from being used at its highest and best use. We propose a variety of partial solutions, which include facilitating greater reliance on water markets as well as a water tax that would vary across regions and over time to encourage conservation. Keywords: surface water regulations, surface water allocation, surface water tax Interjecting Economics into the Surface Water Dialogue 1 Master of Public Service and Administration students, Bush School of Government and Public Service, Texas A&M University 2 Faculty Advisor - Bush School of Government and Public Service, Texas A&M University * Corresponding author: jmgriffin@tamu.edu Maria Vaca,1 Stefni Richards,1 Alexa Davis,1 Kylie Jackson,1 Nanag Timur,1 Fahad Manzoor,1 Said Azam,1 Robert Feltman1 and James Griffin2* Citation: Vaca M, Richards S, Davis A, Jackson K, Timur N, Manzoor F, Azam S, Feltman R, Griffin J. 2019. Interjecting economics into the surface water dialogue. Texas Water Journal. 10(1):112-127. Available from: https://doi.org/10.21423/twj.v10i1.7062. © 2019 Vaca M, Richards S, Davis A, Jackson K, Timur N, Manzoor F, Azam S, Feltman R, Griffin J. This work is licensed under the Creative Commons Attribution 4.0 International License. To view a copy of this license, visit https://creativecommons.org/licenses/by/4.0/ or visit the TWJ website. mailto:jmgriffin%40tamu.edu?subject= https://doi.org/10.21423/twj.v10i1.7062 https://creativecommons.org/licenses/by/4.0/ https://twj-ojs-tdl.tdl.org/twj/index.php/twj/about#licensing Texas Water Journal, Volume 10, Number 1 113Interjecting Economics into the Surface Water Dialogue Terms used in paper Acronym Descriptive term CFS cubic feet per second CIF Community Involvement Fund GDP gross domestic product GCD(s) groundwater conservation districts LCRA Lower Colorado River Authority MSB marginal social benefit MSC marginal social cost MWD Metropolitan Water District PVID Palo Verde Valley Irrigation District PDSI Palmer Drought Severity Index SWIFT State Water Implementation Fund for Texas TCEQ Texas Commission on Environmental Quality TWDB Texas Water Development Board WAM Water Availability Model INTRODUCTION Paradoxically, while Texas is a leader in the science of model- ling surface water flows (see Wurbs 2015), economic efficiency has taken a back seat to other criteria in the surface water policy dialogue. These other criteria can include protecting existing stakeholders, guaranteeing environmental flows to bays and estuaries, protecting water for local use, and so forth.1 Each criteria yields separate, and often conflicting, policy recom- mendations around which various interest groups coalesce. The result is an emotion-charged political patchwork fashioned during severe droughts. In the past, ignoring economic criteria was relatively costless because Texas had an abundance of both surface water and groundwater. But with population growing from 11.2 million in 1970 to an estimated 29.1 million by 20192 and the state’s gross domestic product (GDP) topping all but 10 countries,3 we can no longer afford to exempt Texas’ 1 Other examples include protecting: touristic areas, animals and wildlife, other economic activities. 2 Texas State Demographer. https://uspopulation2019.com/popula- tion-of-texas-2019.html 3 This ranking is obtained by comparing the GDP of countries from the World Bank Data (2018) and the Texas GDP from the Texas Comptroller 2018 website. water resources from economic scrutiny. Griffin (2017) offered a critique of groundwater policy from an economics perspec- tive. This sequel paper offers an economic critique of surface water regulation and is based on a 2017 Bush School Capstone report (Vaca et al. 2017) to State Comptroller Glenn Hegar. By adopting the conceptual lens of “economic efficiency” as this paper’s evaluation criterion, further justification is in order. Economic efficiency requires that for the last tranche of water consumed, the marginal social cost (MSC) of pro- viding water just equals its marginal social benefits (MSB).4 Note that the terms “social” costs and “social” benefits implies that we adopt a holistic approach looking at society as a whole in which environmental costs are factored in. Economic inef- ficiency can occur either with too little (MSC>MSC) or too much (MSB