Cadillac Desert revisited: property rights, public policy, and water-resource depletion

To alleviate Arizona‘s dependence on groundwater, the federal government subsidized construction of the Central Arizona Project (CAP) to import water from the Colorado River. In exchange for the subsidy, Arizona reformed its groundwater law to eliminate common-property pumping and to ban groundwater mining after the year 2025. We build a model of water resource development in which imported water is a capacity constrained backstop. The model is applied to quantify the welfare effects of alternative CAP construction dates and Arizona groundwater laws. We reach two general conclusions. First, CAP was completed 86 years too early, in 1987, at a deadweight loss of $2.612 billion. Ironically, construction in 1987 yielded lower surplus than never constructing CAP. Second, the political exchange of reform for subsidy introduced a greater loss ($2.612 billion) than it corrected ($0.810 billion). The exchange was worse than doing nothing at all.