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municipal uses have the secondary affect of eliminating or delaying new diversions, instream values are not lost. The conventional wisdom described above regarding the role of irrigation in the West holds not only that water has been an important source of regional growth, but that removing water from agriculture would have significant negative economic effects. In fact, there is little evidence to support this hypothesis. Direct economic impacts to the agricultural sector from loss of irrigation water are measured by ,,~t economic value foregone and will be registered on the products with the lowest value productivity. In the sectors losing water (generally forage, and food and feed grain production), the net economic value foregone for a 10 to 20 percent supply reduction will usually fall in the range of $5-$30 per acre-foot. On the other hand, the gain in net value of product or in a municipality's willingness to pay is likely to be at least five to ten times as high. Indirect impacts, measured by income from primary regional resources ("value added") and by employment per unit of water (including multiplier effects), indicate that these secondary losses associated with transferring water from agriculture, while not insignificant in terms of either income flows or employment, are dwarfed by the gains in nonagricultural sectors. In particular, the sectors most likely to be affected (again, forage, and food and feed grains) yield relatively small indirect employment and income effects when compared to those for emerging urban sectors (Young, 1983). The economic interests of farmers whose water is transferred to urban uses are generally protected by existing state institutions, but transaction costs may be high and decisions binary, i.e., water is sold or not sold. More flexible and imaginative alternatives, including agricultural-municipal drought insurance (an annual premium payment by cities to farmers for the right to callout the irrigators in very dry years) or the movement of conserved irrigation water to municipal uses. The state, through its legislature and executive, could act to create the mechanisms that would make it possible to include these options in the arena of agricultural-municipal water bargaining. In addition, the State could anticipate how fast irrigation water will be lost (this is likely to be slow--a few percent per year), so that indirectly affected workers and businessmen are given time to adjust. The second example--interstate water leasing--involves a grander scale. The State might consider the establishment of conditions that would make it possible to lease its as yet undeveloped Colorado River compact water to others without requiring private water rights holders to establish a beneficial use as a prerequisite to participate in lease arrangements. By creating the kinds of conditions that would not require project construction (the Bureau of Reclamation has all the storage necessary to effect any kind of Upper Basin-Lower Basin transfer [Langbein, 1959]), the State of Colorado in partnership with private water rights holders could realize some of the value of its unused compact allocations. Moreover, by doing so it would be establishing a clear ownership position by virtue of the lessee's acknowledgement that, in order to use the water, it had to r'ent it from Colorado. A maturing water economy presents Colorado with a variety of opportunities. In an environment where there is competition for money from every State agency, every dollar must be spent wisely. Making it pasier for water users to take advan- tage of interdependencies in water supply systems would stretch capital funds and simultaneously improve system efficiency and protect instream flows. -15- *****Preliminary Version: Not for quotation or attribution without permission of the authors.*** PRINTED WITHOUT BIBLIOGRAPHY,