21 Apr 2008

Water Markets extra

Francis, a reader at Marginal Revolution, asks:
Some showing that before you post again in favor of "water markets", you have read California Water Code section 1725 et seq., governing changes in points of diversion.

Or, more generally, that you have a way of reconciling your commitment to existing property rights with the destruction of property rights necessarily required for a water market.

(California does have a water market; however as it is largely between governmental agencies the market lacks liquidity.)
Here are my thoughts:

CWC section 1725 et seq. could be modified for markets, but there are differences between trading diverted water and consumptive water. This code is a bureaucratic barrier to markets. The essential point is that any modification reflect the rights embedded in 1725.

The "destruction of property rights necessarily required for a water market" is NOT necessary. Most pro-market people in water recognize that farmers should be allowed to trade their rights. The Enviros tend to favor a public trust seizure of water for in-stream uses -- which does pit one side of common law against another.(I will write more on that soon.)

California's market is between governmental agencies because 80 percent of tap water is publicly-delivered, and nearly all ag water is run through the Bureau, DWR or local irrigation districts. It's likely that water markets will be between agencies. The trouble is getting them into that nimble perspective. I think that farmers -- working through irrigation districts -- will be the marginal traders that bring more efficiency to water use in California. Cities are mostly paralyzed in terms of trading, but they will provide the $$.


  1. Classic characteristics of an efficient market (this from a lawyer, not an economist):

    Multiple sellers
    Multiple buyers
    Low entry and exit costs
    Low transaction costs
    Profit motive
    Property rights protected
    Impact of transaction on third parties and on environment limited and/or included in price

    Characteristics of California water market:
    [reverse each of the foregoing]

    Seriously, the fine people at Mar. Rev., Prof. Adler and you really should know better than to throw around the word "market" like some talisman for moving more water to cities at lower cost.

    There are laws that can be passed that encourage conservation among m&i users, that limit the environmental harm from ag discharges and that lower legal and institutional barriers to both short-term and long-term ag-urban transfers. But none of this creates anything that resembles a "marketplace" for water.

    Notably, virtually every attempt to truly privatize retail water supply has miserably failed. Look how people are grousing now about high gas prices. Try having radical price spikes in water and you'll see governments re-nationalize water systems in order to avoid riots.

  2. "Characteristics of California water market: [reverse each of the foregoing]"

    I disagree. There are many sellers and buyers. Entry and exit is tough but not necessary. Transactions costs are high because most trades run through legal and regulatory hurdles. Profit motive is there (saving money is a form of profit), and nobody is questioning property rights. Third party impacts can be addressed in various ways and must be addressed.

    I understand that you are speaking as a lawyer, and it is clear that you are not conversant with more-abstract versions of markets. (I guess I am being rude. It has nothing to do with you, but what I consider to be your uninformed opinions.)

    Passing laws to "fix" things is the last thing we need to do with water in California. If anything, there should be fewer laws -- as what we get is the tragedy of the anti-commons now.

    Further, nobody is talking about privatizing water. Water trades among public and cooperative bodies are not only feasible, but necessary. In my dissertation about MWDSC, I don't even bother to discuss privatization because it brings no benefits.


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