This report identifies key issues related to the economic efficiency of water development, allocation and use in California and discusses general policy changes that might improve economic efficiency. Policy options focus on water pricing, water transfers, water use efficiency (i.e, conservation) and State development and enforcement policies. Analysis is provided at a scoping level of detail. Some important empirical issues that weigh on the relative merits of potential policy changes are not addressed.

Efficiency of water use has never been more important in California. There is a need to save water and money. California has recently made progress in improved economic efficiency of water use, but major issues remain. Also, recent changes in the amount and location of supplies suggest a review of allocation efficiency.

There are two important efficiency topics that this paper does not address in detail. First, economic efficiency of water use for ecosystem purposes is a viable concept, but it is difficult to apply given the state of Delta ecosystem science and the current range of possible futures. We can not quantify the relationship between water and ecosystem functions and values. Therefore, our ability to prescribe efficiency changes related to Delta water for ecosystem purposes is limited.

Second, this paper also does not address the economic efficiency of major new storage or Delta conveyance facilities. The efficiency of specific water supply projects including regional or local conjunctive use and groundwater storage projects are also not considered. These are being addressed in different forums.

This report focuses on other types of uses, allocations and development of water. A variety of potential actions and policies that might improve efficiency in the allocation, use and development of water resources are discussed. Some of the efficiency issues are

• Are water allocations under California’s water rights systems efficient?
• If there are inefficiencies, could an effective water transfer market increase efficiency?
• Are there barriers or constraints to water transfer markets that should be removed?
• How could water pricing be changed to increase efficiency?
• How could California encourage efficiency in the use and development of water through incentives such as grants and loans, and through enforcement?

In all cases, our findings represent potential improvements from the perspective of economic efficiency alone. There are usually other, non-economic considerations which would play into the larger question of the laws and policies that might be changed.