According to this letter from environmental groups [pdf], the all-in cost (operations, capital, energy) of delivered water to WWD is $150/acre-foot. What’s interesting is that we don’t know what WWD pays the Bureau of Reclamation for its water. (I’m guessing it’s free, since WWD has contracts.)

According to this PPIC piece [pdf], subsidies are misunderstood [these are my summaries of their points]:

1. The value of subsidies is capitalized into land prices. That was a windfall for farmers at the beginning of subsidies, but not farmers that bought land later; they paid more, since they counted on subsidies continuing.
2. “Eliminating water subsidies is not the only way to encourage farmers to conserve water.” Farmers will be more efficient if they can sell conserved water in markets.

While I agree that both of these statements are true, I do not agree that they justify the continuation of subsidies, both explicit (prices lower than cost) and implicit (price lower than what others would pay, which implies an “opportunity cost” from potential misallocation). Further:

1. This excuse can be offered anywhere, at anytime, but two wrongs (we gave you a subsidy, so we have to keep giving you a subsidy) don’t make a right. The same logic implies that we should never stop a bad program. Yes, we should — as soon as we see that it’s not working.
2. If farmers had to buy their water on markets, then it would still go to highest and best use, but the money from that value would go to taxpayers, not farmers. Further, farmers who are given water think “how do I use my allocation?” Farmers facing a market price for water think “how much do I need?” That’s a totally different idea. It’s easier to use less when you have to buy it, instead of cutting back/selling what you have.

Bottom Line: Subsidies lead you to do things that you wouldn’t otherwise do. Those distortions in behavior may be good (free vaccines) but they are often bad (cheap corn for feedlots and HFCS). Use them rarely and carefully!

Hattips to JM and RM