Water for Arid Regions: An Economic Geography Approach

This paper develops a two-region trade model to consider how the uneven allotment of water resources and the availability of interbasin water transfers affect the intraregional distribution of land between urban and agricultural use and the interregional distribution of the population when regions vary in natural amenities, agricultural productivity, and urban agglomeration economies. In each region, urban and agricultural sectors compete over a fixed quantity of land and agricultural goods face transport costs. Three different trade regimes for the agricultural good are considered: autarky, incomplete specialization, and complete specialization. Under autarky, a rise in the agricultural productivity of the water importing region increases the local urban sector. Once regions begin to trade, an increase in the agricultural productivity of the water importing region increases the urban sector in the water exporting region. An increase in natural amenities in the water importing region increases the local urban population driving agricultural production to the less productive water exporting region. Urban agglomeration economies have a small impact when the population is more evenly divided but large impacts when there are large population differences between regions. Reductions in the available supply of water increases both water and agricultural prices and may reduce the quantity of land devoted to agricultural production. A graphical example is presented to show the impact of the parameters on land use patterns, population size and regional prices. The model is then calibrated to reflect stylized facts for California.