17 Jul 2012

Fair to efficient to fair

I recently did some consulting on "making markets" for water.

In the conversation, we arrived quickly at an important point:
  1. The government is going to decide (or affirm) the initial distribution of water, but
  2. There needs to be some form of market to REdistribute that water for efficiency.
Further, (1) determines who gets the "rents" from water resources, but (2) will make sure that water goes to highest and best use -- in economic terms.

I still think that environmental flows that provide public goods (making them hard to value) should be reserved before (1) even occurs.

Also note how this pattern (fair, then efficient) contradicts the conventional pattern in political economy, i.e., allow economic activities to happen first, then use political tax transfers to deliver fairness, but it really doesn't if you think in terms of ordering, stocks and flows, namely:
  1. Make a politically fair allocation of a stock of assets (land, water, etc.) to citizens.
  2. Allow an economically efficient reallocation of those stocks via markets so entrepreneurs can produce flows of benefits to themselves and customers.
  3. Politically redistribute some of those economic surpluses (via taxes*) to pay for public goods.
Bottom Line: Keep incentives aligned with stocks and flows of economic and natural assets if you want to maximize BOTH fairness and efficiency.

* I prefer property taxes as the purest type of tax. Income taxes discourage work; expenditure taxes are labor intensive. Both are much harder to track/administer.


HG said...

First, on your concerns for fairness and efficiency, how does "political fair allocations" and "economically efficient reallocations" avoid pricing people out of the market altogether? On a volunteer trip... I was talking to one woman who was completely against the idea of water as a commodity and thus, water markets. Her adamant concern was of pricing people out of the market. Thus my question: What would be a compelling argument to combat this somewhat widespread fear?

Second, I like your political-economic language when talking about strategies for water markets, but what about the legal language? When talking about allocations, and more directly, about reallocations, you start to tread in unclear legal territory of rights transfers. When I've brought this up with people invested in river conservation, they shy away because the legal component is mucky. Not knowing enough to push the issue further, I've been halted. But I think it's an important piece that needs to be addressed. If individual stakeholders are allocated economically valuable environmental assets--shares in a river--for reasonable and beneficial use, is there a potential for allocating some of that share back to the river? If so, and this is now something California Environmental Lawyer, Tom Hicks, has been working on, is there a significant opportunity for tax deductions with said "rights transfer"?

David Zetland said...

@HG -- First, some people are priced out of ALL markets (e.g., mercedes), and that's true for economic water (used for irrigation). Not common for tap water b/c it's soo cheap, but you can also subsidize people to make sure they have enough to live (lifeline). That's not really relevant in the US, since we're rich.

Second, lawyers can screw up anything (remember bill clinton's response "how do you define sex?"?) that said, markets need laws to work. Tax laws are an annoyance due to political manipulations. Enviro water is hard to handle in a market.

Anonymous said...

In most of cases the issue is not fairness, but possibility. Fairness is a good term that is commonly in contradiction with engineering possibilities (and finances as a result). Please forget about fairness/access/affordability/equality if this cannot be done efficiently.

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