plies to augment and substitute for ground water have been developed at great cost in anticipation of future demands.

As is the common practice, the price of ground water in Tucson does not reflect any of the commodity values, including the extractive and in situ service flow values. It is based on the cost of distribution, including capital, operations and maintenance, and administrative costs. Ground water is thus the least expensive and highest-quality water supply available. In a dynamic pricing environment, water would be priced to incorporate marginal extraction cost and user cost and would reflect the values of all use and nonuse service flows.

Instead of relying on price to ration scarce ground water supplies, Arizona water managers have focused on regulations and other nonprice policies to reduce water use. The total economic value of ground water supplies in any location is affected by the institutional, policy, and hydrological constraints that shape current and future use and define management options. Policy-makers must recognize this institutional and political context in order to make an accurate assessment of the services ground water provides.

Tucson's Water Resources

Tucson has relied on a high-quality ground water supply to meet all of its demands for water. Ground water use has exceeded natural recharge (precipitation and return flows) annually since 1940, leading to a situation in which over half of annual use is from mined ground water. In Tucson's desert climate, there are no viable local renewable surface supplies (other than municipal effluent) to substitute for ground water resources.

Although there is a substantial amount of ground water in the aquifer, dependence on mined ground water has a number of negative consequences. Falling ground water levels have eliminated many of the free-flowing rivers, streams, and associated riparian habitat in most of southern Arizona. The risk of subsidence with continued depletion of ground water is quite severe in the central Tucson wellfield that underlies the city of Tucson; a worst-case estimate is that the ground level will drop by 12 feet by 2024 (Hanson and Benedict, 1994). In addition, the most productive parts of the aquifer are nearly exhausted, which can be expected to lead to substantial increases in pumping costs. As a consequence of municipal pumping in the central Tucson wellfield, ground water levels have fallen as much as 170 feet.

Legal and Institutional Constraints

Legal and institutional constraints on ground water use frame the valuation context. The Tucson Active Management Area (AMA) is one of five AMAs in the state established pursuant to the 1980 Groundwater Management Code. The Tucson AMA has a statutory goal of safe yield by 2025. The safe yield goal



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