12 Mar 2012

Prices create property rights

While in Arizona, I heard about a case in Orlando Florida, where a wastewater treatment plant (WWTP) was initially giving away -- and later selling -- treated effluent for non-potable uses (golf courses, etc.). Revenue from sales was a form of bonus to the WWTP, since its expenses were covered by user fees.

Effluent became even more valuable when a drought reduced water supplies in the area, but the drought also attracted attention to this "surplus" water, and the state Department of Environmental Protection (DEP) requisitioned all the water for discharge into wetlands.

Although the DEP was within a grey area of the law, it's obvious that WWTP customers and the buyers of that water were denied money and useful water, respectively. (It's also obvious that the "lost water" was sourced from elsewhere, perhaps creating even greater environmental damages than DEP was reducing.)

Besides protecting their deal through a change in law, I suggested another way to "perfect" their respective rights to engage in those transactions: the WWTP could have held regular auctionsfor that water. Those auctions would have created a paper trail of rights (the right to sell, the right to buy) and prices that DEP would have not been able to sever so easily. At best, the DEP would have had to make its OWN bid for the water, which would have protected the WWTP's cash flows and allowed other buyers a fair shot at the water.

Bottom Line: It's worth paying for something that's "free" if payment protects your future supplies.