Water Allocation, Return Flows, and Economic Value in Water-Scarce Environments: Results from a Coupled Natural-Human System Model

In many parts of the world including the western United States, the allocation of water is governed by complex water laws that dictate who receives water, how much they receive, and when. Because these rules are generally based on the seniority of water rights, they are not necessarily focused on maximizing economic value across the entire economy. The maximization of value from water use economy-wide is a complex optimization problem that must explicitly consider each user's water demand, willingness to pay (WTP) function, and the feedbacks among users in a coupled natural-human system model. In this study, we distill these complexities into a simple MATLAB (R) model developed to represent a two-user economy with water-dependent sectors representative of agriculture and industry. We feed the model with realistic values of relative water use, relative willingness to pay, and return flows to explore the relationships among these factors in water-limited systems. We find that the total economic value generated from water-dependent users depends primarily on the total water available in the system. However, for a given volume of water available, economic value is not necessarily maximized when all the water is appropriated to the user with the highest WTP. Rather, total economic value depends on the amount of water available, the relative WTP between the two users, and on the return flows generated from each sector's water use. While our simple two-user model is a significant abstraction of the complexities inherent in natural systems, our study provides important insights into the coupled natural-human system dynamics of water allocation and use in water-limited environments.