Agricultural Economics Department


Date of this Version

January 2008


Published in Cornhusker Economics, 01/09/2008. Produced by the Cooperative Extension, Institute of Agriculture and Natural Resources, Department of Agricultural Economics, University of Nebraska–Lincoln.


In the September 5, 2007 issue of the Cornhusker Economics we argued that cap and trade water markets could significantly reduce the cost of groundwater allocation. Capping the total amount of water pumped with an allocation, and then permitting allocating rights to be traded, reduces control costs because water can move to where it is most valuable. Irrigators with inefficient irrigation systems or relatively unproductive land sell all or part of their allocation rights to irrigators with more productive operations at a mutually agreed upon price that makes both parties better off with no change in total pumping. Subsequent work suggests that cap and trade markets may be able to increase the effectiveness of a groundwater allocation program as well as reduce costs.