7 Mar 2012

When do water markets make sense?

SL writes:
As a complex adaptive systems person, I couldn't help but wonder [from your example] about the impact of a farmer's decision to stop producing alfalfa? Or cotton, etc.? How do we realistically forecast the impact of those choices as we fiddle with local “solutions”? It would seem (I say confidently with no justification for such bravado) that agricultural water use challenges have far greater social or collective impact. I am inherently conflicted on the balance between individual property rights in conflict with greater social “good”.

While I cannot justify the idea that all resources must serve and ultimately only belong to the collective, I cannot ignore the impact of decision making which is driven solely by individual gain. What occurred to me when you were speaking [at the Commonwealth Club] is that perhaps our assumption that resources exist to serve humankind is our first error in thinking. What would happen if we started with the assumption we had no rights to these resources? How would we proceed in our relationship to water then?
SL raises two important questions, which I will answer in reverse order:

What if we had no rights to water resources? The implication here is that one could not divert water from its natural course without permission from some PERSON (leaving aside the possibility that some divine being or animal would have that control). In this scenario, property rights lie with "deep ecologists" who could insist that no water be diverted from its course. Assuming they could not be killed for intransigence, they'd have to be persuaded that some water should be diverted for, say, agricultural irrigation (food) or drinking and sanitation (health). Over time, I'd guess that quite a lot of water would be diverted, but not even close to what we divert today, based on property rights that have been allocated long before "environmentalism" was hip.

What about farmers' decisions? Taking an agricultural diversion as given, there's little need for deep thinking about how the farmer uses the water, except to acknowledge that the farmer is likely to try to make as much money as possible from it (there's also a place for "tradition" in terms of use, but we can wave out hands and roll that into "profit") -- given the farmer's choices. Some farmers are required to grow certain crops (e.g., cotton in Uzbekistan); others are incentivized to grow crops by subsidies (e.g., corn in the US); while still others grow a crop instead of selling the water for urban or environmental use because there's no market mechanism to make that transfer.

Bottom Line: Our water use choices do affect others and the environment. We can minimize their negative impacts by using a non-market mechanism (i.e., politics) to allocate water to social uses (the environment) and then a market mechanism (i.e., economics) to allocate water among personal uses (agriculture, industry, urban, energy, etc.).


  1. potentially, your best post to date. potentially.

    still undecided if non-market mechanisms will truly minimize negative impacts. as long as the rights are clearly defined the environment can exercise it's voice with the almighty dollar (e.g. instream flow markets of the NW).

  2. Well said! I would add an alternate solution for diversion in scenario number one- diversion based on principles (based on belief of "no inherent rights to own" but instead on a, let's say, "we are visiting and need to use with respect and consideration" principle) rather than individual or local negotiating skill. We have been proposing this in the leadership realm for some time. The principle(s) in turn provide a guiding framework for local contexts. (In this application, governance comes when citizens violate the principles.) A huge leap in civic behavior, I realize.

  3. Interesting.

    This idea: "no inherent rights to own" but instead on a, let's say, "we are visiting and need to use with respect and consideration" principle is the basis for most western (european and north american) water law and traces back to the Institutes of Justinian (at least as it applies to surface water). Western US water law assigns more absolute use rights (but not fee-simple ownership), but still requires that uses be beneficial.

    Arms-length transactions, if not complete markets, where one beneficial use displaces another, could be used to drive higher collective value. This tool, was created to help answer the very question of how to understand what might change if one water use was "traded" for another (with the potential of Coasian side-payments).

    Fun questions, and great answer(s)!


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