Water Markets and Storage: Substitutes or Complements for Drought Risk Mitigation?

Are water storage and water markets complements or substitutes? This paper examines the conditions under which water storage for drought risk mitigation augments or attenuates water market gains from trade, and conversely, the conditions under which water markets augment or attenuate the value of additional water storage. The analysis is performed in the context of the Prior Appropriations doctrine in a fully appropriated basin. Two stylized examples based on water use at the intensive and extensive margin are provided, along with simulation results for proposed water storage projects and market development in the Yakima Basin in South-central Washington State.