Optioning Agricultural Water Rights for Urban Water Supplies During Drought

Abstract

Abstract Option contracts for temporary use of irrigation water rights are evaluated as a less‐expensive institutional arrangement for providing drought insurance for urban water agencies. Desirable option contract provisions are suggested and a framework for evaluating the economic benefits of water supply options is proposed. An integrated analytical system simulating the hydrologic, institutional, and economic relationships for a case study area in northeast Colorado is developed to evaluate the economic feasibility of water supply option contracts. Estimated present value benefits and sensitivity analyses indicate that dry year water options are economically viable over a considerable range of conditions.