Introduction
Man, like every living thing, has a natural relationship with water. He demands water to survive; and as a function of derived demand in the procurement of practically all types of food, which he also needs to survive. Water rights have played an important role in the development of agriculture and the creation of property rights that flowed from that activity. Modern day Egypt surrounding the Nile river, was the first permanent agricultural settlement, and formed the first distinct property rights. These settlements were originally linked to free peasants, but were modified as tribalism became more formalized into the political Pharaoh (feudal) system over time. (Barnes, 15)
Water rights have always been a very political process. This is because of water’s role in the success of civilizations. Water is often considered a common resource because it is often rivalrous and impossible to exclude others. This, of course, makes it susceptible to all of the pitfalls of common resources. Economic theory would predict that it would be overdrawn, and investment in it would be minimal. This is often the case, but governments attempt step in to attempt to regulate this common resource in a way that provides access and creates a market. In doing so, they also, often, create monopolies.
How does the government create a market when it has simultaneously eliminated all competition? It is difficult for policy makers to successfully mimic true equilibrium absent political pressures; adding them in it is almost certainly impossible. (Hayek, 3) Yet it is finding this true equilibrium which will preserve the resource that these regulators seek to manage the best. Only by finding this true equilibrium will market distortions be removed. Privatization is one option that solves common resource issues, but some aspects of freshwater are difficult or impossible to privatize fully. Another possibility is to explore is the concept of collective voting rules for tightly defined property holders. Because perfect solutions are unlikely but this remains a problem of over-consumption because of imperfect market mechanism, it is important to find a better solution.
Water Rights
Property rights have historically been attached to land, but water rights have often been as important or more than the land itself. Richard Ely and Edward Morehouse, authors of the foundational agricultural economics text, Elements of Land Economics, formalize water’s uses as “ (1) for purposes of consumption, such as drinking water, domestic use, in manufacturing; (2) for navigation; (3) for the food products and resources it may contain such as fish, clams, oysters, kelp.” (Ely & Morehouse, 150) It was outside of the scope of their text, but energy production could also be added to that list as hydro-power is another major use of water. Property rights have historically meant that owners possess and may use all the land below the surface including the water within it.
Water presents a challenge for fully delineating property rights. A property owner that has water beneath the land of his property may find it difficult to exclude a neighboring property owner from extracting water from their own property. (Barzel, 2) The water aspect of their property rights is difficult for the owner to protect, and thus rivalrous despite delineated properties. Water that is below the surface does not respect lines of property and thus there is a dynamic nature of water rights with regard to a property holder’s rights. The rule of capture is a concept that courts have upheld which gives property holders the right to extract water, oil, etc. even if it was originally from an adjacent property below the surface. (Gordon, 281) Aquifers and other forms of ground water thus often take on properties of commons despite the fact that they are often privately held as property holders maximize extraction from what is essentially a shared resource. Also, while the property owner may own water below the surface of his land, and/or access to a substantial aquifer, he does not have control of the hydrological cycle which is a variable that contributes to the make-up of water on land and below. (Ely & Morehouse, 151)
Water property rights are also often defined in relation to waterways such as rivers. Rivers are rarely, if ever, private and take on more explicit commons attributes. Water rights relating to rivers and other communal surface water resources are generally drawn into two types in the United States. The first is the riparian doctrine, which is based on the English Common law and allows for adjacent land owners to have reasonable use of the water. The second is the doctrine of prior appropriation. This concept focuses on five major facets: seniority, beneficial use, diversion, forfeiture, and private property. (Naeser & Smith, 501) These are two fundamentally different approaches to viewing water resource use.
In the eastern United States, the riparian doctrine is dominant. Each adjoining land owner has the right to use water, and no single, similarly situated user receives greater consideration from another. (Ostrom & Ostrom, 6) The doctrine of prior appropriation gives seniority greater rights, hence its name. It stems from the case of Yunker v. Nichols in 1872, which rejected aspects of the riparian doctrine citing the local arid climate. (Hess, 649) Senior users may shut out junior users and unused rights may be forfeited which creates a system of tiered water property rights. (Naeser & Smith, 501) Senior rights holders are given fixed water withdrawal rights as measured in cubic feet per second and these rights are transferable. (Liebecap, 122) Economist Terry Anderson argues that the prior appropriation doctrine of the West is an imperfect privatization strategy. (Anderson, 29)
Figures 1-4
Total Fresh Ground and Surface Water Withdrawals
1990 1995
2000 2005
(National Atlas)
Figures 1-4 show a stark difference in water withdrawal between the western United States where prior appropriation rules are in place versus the eastern United States where riparian rights are in place. Western states clearly have greater levels of withdrawal than eastern states. An important fact to note is that these maps are drawn up by county, and western states tend to have larger counties than eastern states which provide its own distortion. Still, a higher proportion of counties west of the Rocky Mountains have moderate to high levels of water withdrawal than eastern.
Another important thing to note about figures 1-4 is that in the east, counties with moderate to high levels of water withdrawal are more likely to be counties with higher population. In the west, the counties with high water withdrawal are counties with lower levels of population or rural areas. This is especially true in central California, which has a large concentration of high water withdrawal counties. This can be observed as an effect of western irrigation and the system of prior appropriation water rights.
Paradoxically, the prior appropriation system is designed for the Western United States because water was considered more scarce there than in the east. (Naeser & Smith, 501) This law has led to higher levels of extraction rather than lower. This is due to the favoritism created by the law, where some individual’s property rights are given precedence over others, with property transfers still allowed. These aspects of the laws incentivize senior property holders will maximize their extraction whether they need it or not. In effect, they have created transitional gains traps.
Access to clean water is also seen as a human right by the United Nations which clearly stated this in its International Covenant on Economic, Social, and Cultural Rights. “The human right to water entitles everyone to sufficient, safe, acceptable, physically accessible and affordable water for personal and domestic uses. An adequate amount of safe water is necessary to prevent death from dehydration, to reduce the risk of water-related disease and to provide for consumption, cooking, personal and domestic hygienic requirements.” (Committee on Economic, Social, and Cultural Rights) 160 nations have signed and ratified this covenant, but there are a couple notable exceptions such as the United States, Malaysia, Myanmaar, South Africa, Saudi Arabia and other smaller states. Many nations have amended their ratifications in various ways often stating that it is consistent with prior statutes or Constitutions. (International Covenant on Economic, Social, and Cultural Rights)
Isaiah Berlin wrote that rights which provide for equality of opportunity are positive liberty, while rights that provide for equality of income or resources are negative liberty. (Berlin, 1) These are two competing ideas of equality, and are actually paradoxes of one another. In solving the issue of resource inequality, negative liberty removes resources, and is thus unequal from a property rights point of view. Positive liberty similarly provides for equality of opportunity, but it leads to societies of unequal incomes and ownership as a result of natural productivity inequalities and practically infinite differentials of individual choice.
The concept of water as a human right is a clear example of negative liberty. There are many attempts to create welfare transfers relating to water. Keeping the price of water down in proportion to even small incomes is an important goal for most politicians. Different types of water subsidies are common throughout the world, but the ironic aspect of this is that most water subsidies are not designed to help the poor, but instead to hold down irrigated water prices for agricultural businesses.
Water Usage
Water usage is often broken down by domestic use, industrial use, and agricultural use with agricultural use being by far the largest user. This is not a new phenomenon, but the growth in agricultural usage has also had much steeper growth than either domestic or industrial usage. This growth effect tends to go towards industrial uses as countries move along the Kuznet’s curve. Much of this growth is due to the price of water for agriculture being subsidized in various ways. Prices transmit information about utility, scarcity, and expectations of future valuations. When any item is subsidized, this price undergoes a distortion, and the purchaser is unable to make decisions that are based on important factors of utility, scarcity and future expectations.
Figure 5
(Enger & Smith, 465)
Figure 6
(Enger & Smith, 466)
The proportions in figure six give us a glimpse into what makes up figure seven’s time series changes. The continents that have more development (North America, Europe) have higher proportions of industrial water usage. The ones with lower development (Africa, Asia, and Central America) have higher agricultural usage. Oceania runs contrary to the rest of the group. This is perhaps explained by them having the least population density due to being a collection of island nations. It suggests that as nations and continents develop, they use resources more efficiently.
Agricultural usage involves local groundwater (including aquifers where available) and irrigation, often in combination. Agriculture is often set in a watershed. The earliest example of the Nile River watershed is an example of this, but in North America the Missouri River, the Arkansas Red-White River, and the Ohio River all form tributaries into the larger Mississippi River basin. The topography of each one of these river basins fosters their own agricultural development. When available, farmers often also dig wells to use aquifers such as the Ogallala aquifer.
Figure 7
Map of Ogallala Aquifer
(Withgott & Brennan, 417)
Unusual and specialized rules for agricultural water rights are one method of price distortion. These rules are often sought for by the farmers and businessmen that are governed by them, to acquire advantage or value over their competitors. (Stigler, 3) Often these distortions result in higher profits for farmers and producers, but they also trickle down to consumers in the form of lower prices for food and other agricultural commodities. It is an indirect and complicated form of price supports. Keeping the prices of food down is a method that public policy makers with the idea that they are pro-growth. (Brown, 84)
Figure 8
Water Availability Difference from Water Use
(Withgott & Brennan, 425)
Domestic uses of water are what often come to mind when critics speak of the waste and over-consumption of modern society. Critics often advise to use low flow or compost toilets as a method of saving the environment. They also mention turning off the faucet while doing activities such as brushing teeth, washing dishes, etc. Their reasons for these changes are usually altruism based on a notion of resource depletion. The physicalist fallacy is an interesting one for non-renewable resources, but it is misapplied for renewable ones such as water.
Water is a renewable resource which goes through the hydrological cycle. When it is used in an urban or non-urban setting, a step is added to reduce the pollution in the returned water to standardized levels. In urban settings, this means using scaled waste water treatment facilities to treat water and return it to the ecosystem. In many of these cases, the price of treating waste water is included in the water delivery price. In most cases, it dwarfs the price of the fresh water extraction, treatment and delivery. In rural settings, septic systems and leech ponds perform similar filtration tasks on a smaller scale before returning the water to the ecosystem. These systems separately paid for by individual consumers, although waste water treatment facilities often subsidize septic draining as a method of preventing pollution. The returned water may re-enter the active hydrologic cycle in the form of vaporization or return to ground water stock through surface absorption when the water is further filtered through natural processes.
How Is Domestic Water Priced?
Urban water utilities are often referred to as a natural monopoly. (Allen, Buchanan & Colberg, 327) It would be difficult to have multiple sets of pipes for multiple producers going throughout a city and into individual homes. Water is also quite heavy so the transfer cost between local water supplies and delivered water supplies over a medium to large distance can be quite considerable. Therefore, even when there are multiple sources of water treatment for a city, there is generally a single water utility, or water board that makes individual, monopolistic decisions over the water supply and pricing for a city. There are usually strict institutional rules set over the company, and its pricing can be subject to political pressure. Still, there are many pitfalls of monopolies such as abstraction of marginal cost reduction and other profit making priorities because their rate of profit is usually static. Because of their price controls, there is not motivation for production controls. (Allen, Buchanan & Colberg, 329) Underpricing and its corresponding over-consumption are still endemic and problematic to the utility and population at large.
One reason besides pipes that water utilities are natural monopolies is their considerable capital costs. There are many long term durable goods that must be financed and paid off. Many of these durable goods are purchased with loans that are subsidized by the state and federal government. These capital goods must be priced into water rates over the lifetime of the goods and loans. Future capital planning is also an important issue to improve capacity and efficiency to meet future needs better. (Raftelis, 13) This invites the creation of steady state investment estimates. It also invites even greater investment for projected future efficiencies designed at delivering water more efficiently through technical innovation. (Acemoğlu, et al, 132) As populations rise, this becomes a more important issue as resource use per capita changes, especially as non-point pollution increases simultaneously. (Solow, 313) Would-be monopoly profits can be can be redirected towards innovation because profits are regulated. At the same time, this innovation is likely not to be especially efficient in terms of return on investment for the same reasons.
Increasing environmental standards from the Federal government and political demands from local constituencies place pressures for increasingly clean water on both ends. Studies are performed so that water pricing is not higher than 2-3% of median income for both water and waste water treatment. (Raftelis, 5) This makes the practice of water pricing one of reverse engineering rather than operating at marginal costs equals marginal revenues plus regulated monopoly profit. The marginal costs are determined by transmission and delivery costs (which are averaged from varying distances and thus varying costs), cleaning costs, waste water treatment, and various administrative and customer service costs.
The actual decision making process is typically voted upon by water board members. These members are generally appointed in step with the institutional rules of the water board or utility. Their voting preferences are generally reflected by who placed them on that board in a normal public choice bureaucrat role. Ultimately, the decision making rationale for these long term investments are loosely based on not exceeding 2-3% of median income and principles of budget maximization. Water prices have significant menu costs because water prices are generally decided for the year. Thus, marginal costs are actually estimated for the future year from expectations which are based on the recent past. These are done with statistical methods of inference with confidence level spreads, but are open to important events that could dramatically change the price structure. A dramatic uptick in inflation, for instance, could be very problematic for water rates.
Water utilities are also very good at measuring demand, because they are able, in real time, to see consumption rates. These are generally averaged, but a form of pricing technology could be introduced to increase efficiency and reduce stress on the system. Instead of using set rates based on the factors that have just been explained, one could construct a normalized range of prices and place that on daily demand schedules. One issue of water demand is that it is quite variable from hour to hour. It is pretty steady for day to day if seasonally variable.
By creating a range of prices, the utility could charge higher prices during hours of peak demand. These hours tend to be between three p.m. and five p.m. when both businesses and residential consumers are demanding simultaneously. Lower prices within the range could be used at night during periods of low demand. (Mushkin, 288) These changes could have dramatic effects on efficiencies for the operator which could reduce overall costs and provide significant increases in welfare for consumers. One drawback of having a complicated rate structure is that complicated monopoly prices can drive down consumption. (Rubinstein, 474) A better informed consumer, that is the consumer that has more information and is actually able to process it correctly will likely make better decisions within their bounded rationality framework. (Carter & Milon, 265)
Figure 9
Figure 10
Figure 11
(Statistical Abstract (s) 1995-2012)
Water utilities attempt to keep water rates between 1-1.5% of median incomes. (Raftelis, 5) Figures 10-11 show this figure. Figure 9 shows average annual consumption in dollars. It shows stable prices with slight increases until 2004, when prices begin a significant increasing slope. These are nominal prices, so inflation is not controlled for. Figures 10-11 are proportions and are thus not directly influenced by inflation. The recession can be seen by the sharper uptick from 2008 to 2009. It is easy to see that all four regions are well below the recommended 1-1.5% of median incomes in figures 10-11. It is also easy to see the relative stability, especially in the proportions. The strongest factor for the variability in 2008 to 2009 was likely the reduction in incomes and corresponding discretionary spending.
Privatization?
Privatization has been a successful remedy for commons issues all throughout the world. The Tragedy of the Commons, as Garrett Hardin has pointed out, is that when property rights are non-existent or vague, users maximize extraction and minimize reinvestment. Privatizing water is also an easier remedy than many other commons, because there are already businesses making regulated profits, so the market would not have major structural adjustments to make. The strong issues holding back privatization efforts are anti-corporate and anti-globalist protesters, and the rather public nature of water.
Privatization is sometimes seen as a failure of government management of the commons and sometimes as a failure of law. (Bakker, 19) How can a public utility whose market is a monopoly on a basic human need fail? By underpricing and under investing in its infrastructure. As indicated in the water pricing, often water boards act under the budget maximization principle, but other times they are constrained by politicians to hold down the price of water. As durable goods, many utility capital projects rarely need to be replaced, but when they do, planning and long term financial servicing are needed. A common problem in urban settings is for pipes to be neglected, and for them to begin leaking. This is not a large concern in ecosystems where water is plentiful, but in especially arid climates, this can be a significant short circuit in the water delivery system. Often times, these pipes are neglected in poor areas, or they do not exist there at all.
At the same time, pricing is held down below steady state investment levels for political purposes, and other investments are not made in the infrastructure. Water can leak out of leaky pipes and represent a significant loss of water to the producer. These capital projects also often need increases in prices that are politically impossible unless privatization is done simultaneously. Privatization does not always or generally mean that water becomes a laissez-faire commodity, but it does mean that the water company can begin pricing it more naturally. An eye towards current profits, and an outlook on future investment and future profits as well.
Where government bureaucracy maximizes marginal costs as a method of extraction, private industries keep marginal costs as low as possible as a method of maximizing profits. They are also keen to speculate on future earnings and their rights to them. (Posner, 33) This speculation both competes with future earnings potential against present value, but also more appropriately values the rarity of the present values.
Conclusion: Management of the Commons
Elinor Ostrom has a different concept of what she terms ‘pooled common resources.’ These are similar to the rights today, except the institutional rules have changed. Ostrom calls for tiers of property holders, those with access and those with withdrawal. Those with access rights would have full representation in a small group of relevant stakeholders who have, in a sense, collective ownership and thus are able to appreciate gains or losses more than a bureaucrat. These voters then decide the future operations based on the following: management, exclusion, and alienation. (Schlager & Ostrom, 251)
Both privatization and the collective voting rights over the commons are better than the doctrine of prior appropriation. The doctrine of prior appropriation seems have many trappings of the commons, and it also can magnifies some of the worst aspects of them. Because the transitional gains trap associated with it guarantees maximum extraction from senior land owners, if only to lease to more junior ones. Changing these systems will likely be extremely challenging. Special interest groups will be well funded and be well entrenched. Voters will very likely be rationally ignorant about this issue. There are some aspects of commons that are likely impossible to resolve fully. Thus any solutions, such as Privatization or Shared Pooled Resources, are unlikely to provide fully delineated property rights. Perhaps in the future, increases in technology will create better monitoring that will enable further delineation which could enable even better laws.
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(This is an essay that I wrote for my Environmental Economics class.)
