A Letter to the Editor

Lessons for Water Markets

The September issue of PERC Reports contained excellent articles on oil, fisheries management, and water. Taken together, they help us understand why market solutions to water problems are both attractive and elusive.

Water allocation confounds economists. Urban and environmental demand for water has increased, yet the resource remains largely in agriculture. The canonical advice is to let water markets reallocate water to higher-valued uses, but markets’ fitful progress begs explanation.

Water is prone to a tragedy of the anticommons (discussed in A New Fishing Tragedy? September 2004). Third parties, facing negative pecuniary externalities, threaten or exercise a veto over water sales. By permitting these vetoes, society forces government either to reallocate the resource by fiat or augment it to cope with changes in demand. An alternative deserves consideration.

The government should aspire to make water an economic good—secure property, easily transferred and, therefore, available for a price just like land. This would allow incremental reallocation and avoid the rent-seeking and uncertainty that come with periodic government intervention. This will require difficult political work: the definition of the transferable portion of a water right, taking into consideration the correlative nature of water use but discounting the importance of pecuniary externalities; the establishment of a system under which rights disputes can be cheaply, expeditiously, and predictably resolved; and (in contravention of custom and law), the decision not to dictate the uses to which water may be put. While some states have made progress in these areas, most have not.

The result is that the agricultural sector is unable to realize the full value of its assets, and the urban sector builds expensive, environmentally damaging water projects to meet incremental demand growth and cope with periodic drought. A market would allow water to follow the precepts of the functional theory of resources (discussed in Are We Running Out of Oil?” September 2004). Sales would encourage efficiency in agriculture by increasing the opportunity cost of water use and providing the capital to apply existing irrigation technologies and develop new ones. The quantity and cost of the resulting water production would likely be a pleasant surprise to all concerned.

Ben F. Vaughan, IV
Dept. of Business and Economics
Texas Lutheran University
San Antonio, TX

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