Water Rights and Markets in the US Semi-arid West: Efficiency and Equity Issues

There are both high resource and political costs in defining and enforcing property rights to water and in managing it with markets. In this paper, I examine these issues in the semi-arid U.S. West where many of the intensifying demand and supply problems regarding fresh water are playing out. I begin by illustrating the current state of water markets in 12 western U.S. states. There are major differences in water prices across uses (agriculture, urban, environmental) and these differences appear to persist, suggesting that water markets have not developed fully enough to narrow the gaps. Moreover, there is considerable difference in the extent and nature of water trading across the western states, suggesting that water values and transaction costs of trade vary considerably across jurisdictions. I then turn to the resource and political costs of defining water rights and expanding the use of markets. In this discussion, efficiency and equity objectives play important, often conflicting, roles. This tension reflects the very social nature of the water resource. To understand the problems of expanding water markets, it is critical to understand the varying political, bureaucratic, and administrative incentives involved

Open-Access Losses and Delay in the Assignment of Property Rights

Even though formal property rights are the theoretical response to open access involving natural and environmental resources, they typically are adopted late after considerable waste has been endured. Instead, the usual response in local, national, and international settings is to rely upon uniform rules and standards as a means of constraining behavior. While providing some relief, these do not close the externality and excessive exploitation along unregulated margins continues. As external costs and resource values rise, there finally is a resort to property rights of some type. Transfers and other concessions to address distributional concerns affect the ability of the rights arrangement to mitigate open-access losses. This paper outlines the reasons why this pattern exists and presents three empirical examples of overfishing, over extraction from oil and gas reservoirs, and excessive air pollution to illustrate the main points.

Water Rights and Markets in the U.S. Semi Arid West: Efficiency and Equity Issues

There are both high resource and political costs in defining and enforcing property rights to water and in managing it with markets. In this paper, I examine these issues in the semi-arid U.S. West where many of the intensifying demand and supply problems regarding fresh water are playing out. I begin by illustrating the current state of water markets in 12 western U.S. states. There are major differences in water prices across uses (agriculture, urban, environmental) and these differences appear to persist, suggesting that water markets have not developed fully enough to narrow the gaps. Moreover, there is considerable difference in the extent and nature of water trading across the western states, suggesting that water values and transaction costs of trade vary considerably across jurisdictions. I then turn to the resource and political costs of defining water rights and expanding the use of markets. In this discussion, efficiency and equity objectives play important, often conflicting, roles. This tension reflects the very social nature of the water resource.

Chinatown: Transaction Costs in Water Rights Exchanges. The Owens Valley Transfer to Los Angeles.

I re-examine the notorious Owens Valley water transfer to Los Angeles, which is a pivotal episode in the political economy of contemporary western water allocation. Negotiated between 1905 and 1935, it remains one of the largest voluntary water sales in U.S. history. It made the growth of semi-arid Los Angeles possible, increasing the city’s water supply by over 4 times. Water rights were bundled with the land so that the Los Angeles Water Board had to purchase nearly 1,000 small farms. The negotiations between property owners and the agency were complicated. There often were lengthy disputes over farm characteristics, amounts of water conveyed, and valuation of both land and water. Bilateral monopoly emerged between sellers’ pools and the Board. During bargaining impasses, the aqueduct was periodically dynamited. Today, the outcome of the Owens Valley water exchange is viewed as very one sided--one of “theft” by Los Angeles. As such, it discourages contemporary transfers of water from agricultural to urban areas. Using new qualitative and quantitative evidence, especially for 1924-34, when most water-bearing land was purchased, I examine the sources of bargaining conflicts, the timing of sales, the distribution of the gains from trade, and offer a new assessment of the results of the transfer. Implications for current water rights negotiations are drawn.

State Regulation of Open-Access, Common-Pool Resources.

Open-access, common-pool resources, such as many fisheries, aquifers, oil pools, and the atmosphere, often require some type of regulation of private access and use to avoid wasteful exploitation. This paper summarizes the arguments and literature associated with this problem. The historical and contemporary record of open-access resources is not a happy one, and many of the problems persist, despite large aggregate gains from resolving them. The discussion here suggests why that is the case. The paper focuses on government responses to the common pool, the private and political negotiations underlying them, and the information and transaction costs that influence the design of property rights and regulatory policies. Understanding the type of institution that emerges and its effects on the commons depends upon identifying the key parties involved, their objectives, and their political influence. Further, it requires detailed analysis of the bargaining that occurs within and across groups. The paper summarizes the open-access problem and provides case analyses of regulation of common-pool fisheries, oil reservoirs, and the atmosphere. The final section summarizes the general themes and the advantages of the New Institutional Economics (NIE) approach to analyzing the common pool.

The Assignment of Property Rights on the Western Frontier: Lessons for Contemporary Environmental and Resource Policy

In addressing environmental and natural resource problems, there is a move away from primary reliance upon centralized regulation toward assignment of property rights to mitigate the losses of open-access. I examine the assignment of private property rights during the 19th and early 20th centuries to five natural resources, mineral land, timberland, grazing and farm land, and water on federal government lands in the Far West. The region was richly endowed with natural resources, but assigning property rights to them required adaptation from established, eastern practices as defined by the federal land laws. The property rights that emerged and their long-term welfare effects provide a laboratory for examining current questions of institutional design to address over-fishing, excessive air pollution, and other natural resource and environmental problems. A major lesson is that property rights allocations based on local conditions, prior use, and unconstrained by outside government mandates were most effective in addressing not only the immediate threat of open-access, but in providing a longer-term basis for production, investment, and trade. Another lesson is how hard it is to repair initial faulty property allocations. Accordingly, path dependencies in property rules are real, and they have dominated the economic history of resource use in the West.

Institutional Path Dependence in Climate Adaptation: Coman’s “Some Unsettled Problems of Irrigation”

Katharine Coman’s “Some Unsettled Problems of Irrigation,” published in March 1911 in the first issue of the American Economic Review addressed issues of water supply, rights, and organization. These same issues have relevance today 100 years later in face of growing concern about the availability of fresh water worldwide as demand grows and as supplies become more uncertain due to the potential effects of climate change. The central point of this article is that appropriative water rights and irrigation districts that emerged in the American West in the late 19th and early 20th centuries in response to aridity to facilitate agricultural water delivery, use, and trade raise the transaction costs today of water markets. These markets are vital for smooth re-allocation of water to higher-valued uses elsewhere in the economy and for flexible response to greater hydrological uncertainty. This institutional path dependence illustrates how past arrangements to meet conditions of the time constrain contemporary economic opportunities. They cannot be easily significantly modified or replaced ex post.

The Demarcation of Land and the Role of Coordinating Institutions

This paper examines the economic effects of the two dominant land demarcation systems, metes and bounds (MB) and the rectangular system (RS). Under MB property is demarcated by its perimeter as indicated by natural features and human structures and linked to surveys within local political jurisdictions. Under RS land demarcation is governed by a common grid with uniform square shapes, sizes, alignment, and geographically-based addresses. In the U.S. MB is used principally in the original 13 states, Kentucky, and Tennessee. The RS is found elsewhere under the Land Ordinance of 1785 that divided federal lands into square-mile sections. We develop an economic framework for examining land demarcation systems and draw predictions. Our empirical analysis focuses on a 39-county area of Ohio where both MB and RS were used in adjacent areas as a result of exogenous historical factors. The results indicate that topography influences parcel shape and size under a MB system; that parcel shapes are aligned under the RS; and that the RS is associated with higher land values, more roads, more land transactions, and fewer legal disputes than MB, all else equal. The comparative limitations of MB appear to have had negative long-term effects on land values and economic activity in the sample area.