The Value of Water Rights in Agricultural Properties in the Phoenix Active Management Area

This paper estimates the value of water rights in the Phoenix Active Management Area (AMA), Arizona. Within AMAs groundwater rights cannot be transferred separately from the agricultural land to which they apply. As a result there is no separate market for ground water rights. The lack of a market creates two problems: there is no direct signal of the scarcity of water and no mechanism for reallocating water from low-to-high value uses. Water can only be reallocated by changing land use. With the growth of metropolitan Phoenix the value of water committed to residential, commercial or industrial use has increased rapidly relative to the value of water committed to agriculture. This has led to the reallocation of land from agriculture to urban uses. To estimate the implied value of the water right we used the hedonic price method to explore the impact of water rights on property values using 391 agricultural land transactions that occurred between 2001 and 2010. We tested two main hypothesis that (1) the marginal willingness to pay (MWTP) for water rights is higher in more developed urban areas than it is in undeveloped rural areas, and that (2) that the MWTP for water rights in urban areas varies across cities. We found the MWTP for water rights to be highest among properties in urbanized or urbanizing areas where a large proportion of the land has already been developed. Additionally, we found that the MWTP for water rights varies significantly across cities within Maricopa County.