Monthly Archives: November 2015

Why haven’t I heard about market thickness before?

My friends.  I am wroth with you.  You are brilliant and tell me the things I should know, but none of you have mentioned “market thickness” or “matching mechanisms” to me before.  I had to stumble on the concept by accident, while reading about market design.  Lack of market thickness is a type of market failure, but not on the usual list of market failures (negative externalities, failure to provide public goods, etc).  This is new to me, but I will rush right in.  Market thickness seems to mean lots of buyers and lots of sellers who can make lots of matches.  Market thinness means not many buyers and not many sellers, who can’t find each other to make the transactions both want.  Lack of market thickness creates three kinds of market failure, the first of which is “the inability of the market to pool a sufficient number of buyers and sellers for carrying out transactions.”

I have heard a couple of economists say on different occasions that they ‘don’t know why the California water market never takes off, but it just doesn’t, maybe it is the transaction costs’.  But reading about market thickness makes me think it is an inherently thin market (sellers and buyers each in the dozens, if that), and that’s not going to change.

There are not going to be new sellers:

  • There cannot be a new supply of senior water rights holders that have more than they want from their historical luck and want to sell.
  • The water we’ve got is more than allocated, and the climate forecasts predict more years like our drought years.
  • We won’t allow people to sell unreplaced groundwater out of basin anymore.
  • There is some potential for ‘conserve and market’, but we’re seeing that farmers want to use better irrigation technology and use that water on their own lands (as well as sell it).  Often, farmers want to farm more than they want to sell water because they like farming.
  • It may be the case that we want farmers to become sellers and exit farming.  That’s largely what happened in Australia.  But so far, we don’t say that part out loud and we worry about what happens to rural economies.  So far, we pretend that’s not how we will get additional sellers.

There are not going to be many new buyers:

  • Mostly, cities have the water they need for their current populations and would prefer to develop local supplies (water conservation, stormwater treatment) so they don’t have to depend on flaky other people for something as crucial as water.
  • It is really very difficult to take possession of water, and the initial capital costs of storing and moving it are huge.  People won’t want to get into that business without an assured supply.  The possibility of buying some maybe water is not the same as a right to whatever’s there in perpetuity.  The cities and the projects we’ve already got are the only real prospective buyers, and most of them want to use what they’ve got and control their water supplies other ways.

Other factors:

  • Buyers and sellers must be within a somewhat small radius and have connected infrastructure, before the transaction costs of moving water make water more expensive for the buyer than re-treating local water.  This decreases the market thickness.
  • Very limited pump capacity through the Delta, effectively creating two smaller pools of buyers and sellers.  Within those pools, the buyers and sellers are often facing the same hydrologic conditions, so there’s less potential for arbitrage.
  • Storing water is a difficult problem, as is accounting for water.  Buyers are at risk on both fronts.
  • There are different pools of buyers for kinds of water.  Not everyone can use raw water, nor afford the capital to turn it into potable water.  This also limits buyers.
  • There is a narrow time window for wanting to make the purchase/sale.  Neither the buyer nor seller know what is available much before April.  Agricultural buyers are primarily interested in water they can use before September.  Buyers and sellers can’t know what is available the following year.
  • In drought years, there will be more buyers but fewer sellers (because sellers don’t have any water or want to use it themselves).  In wet years, there will be more sellers but fewer buyers (because of the storage problems and getting water through the Delta pumps).

Some implications:

  • Barely anyone is talking about this. Two hits!  I am not seeing an application to California.
  • I now understand that people who say “remove ‘use it or lose it’ from California water rights” are trying to increase the market thickness by reassuring sellers they are safe to participate.
  • We already see active small-scale intra-district water markets.  There are buyers and sellers for water on that scale.  Larger intra-California water transfers are perennially stalled.  Urban users have no interest in purchasing water in daily sales; they just want it to appear at their tap, cleaned and pressurized.
  • Having a thin market makes it difficult for buyers and sellers to find each other, but the problem isn’t going to be solved by communications or a ‘central trading post’.  With relatively few sellers and relatively few buyers, there aren’t many potential matches.


I should think about this more before hitting post, but when have I ever shown good judgment before?  This ‘market thickness’ concept explains a lot.

ADDED 12/1:  I was thinking about attempts to enter as a buyer or seller.  Cadiz is trying to enter as a seller, trying to prove the water is really there and sustainable, overcome repugnance and court a few southern California buyers.  Poseidon finally became a seller, and now its only buyer has a glut.  The only successful new entrant as buyer and seller is the Resnicks, with the Kern County Water Bank, more than twenty extremely lucrative years ago.


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Local groundwater sustainability agencies need the State to be Bad Cop

Fresno Bee reporter Ryan Sabelow did a nice job discussing the difficulties the new Groundwater Sustainability Agencies are going to have as they begin to manage groundwater.  But his interview on Take Two adds something he didn’t write in his newspaper piece.  Local grower reactions to the prospect of managing groundwater are so hostile that locally elected people will not do anything voluntary, nor sooner than they legally must.

At 2:45:

There’s a county supervisor who floated this idea of ‘hey, you know, maybe we should put some restrictions on selling groundwater outta county, maybe we should put some restrictions on, not putting in new wells in places that have never been farmed before.’  The blowback he received was pretty intense, from his description of it and they’re basically holding off until 2017 when they form the management agencies.  They’ve decided not to take any proactive steps because they figure that the county is gonna get sued by multiple parties.

At 4:19

They’re basically holding off and saying ‘you know, we, um, we’re not, we’re gonna let the process go, we’re not going to do anything proactive.’

The State should change the default for the nascent GSAs, from ‘status quo is better than the GSAs will bring’ to ‘status quo is worse that the GSAs will bring’.  Right now, the first thing the brand new GSAs are going to have to do is restrict or retire farmland.  If the State declared a moratorium on new permanent crops in basins with declining groundwater levels, the new GSAs would be coming in as the good guys, who could give growers some of what they want.

So far, it has been prohibitively difficult for local elected officials (even ones who are watching deep wells next door threaten their own farms) to face their neighbors’ resistance to managing groundwater.  They are too close; it is too much to live amidst the hostility.  They need a Bad Cop.  Right now, the threat is that in seven or ten years or someday, the State will be the Bad Cop, probably, in some as yet undefined manner.  The State should be the Bad Cop now, so the GSA’s can form and work.

  • The Water Board should declare a moratorium on new permanent crops in basins with declining groundwater, using the Reasonable Use Doctrine.  It is not reasonable to plant something that will need water for three decades over an uncertain water supply.
  • The Legislature should order a survey of infrastructure damaged by subsidence and a financial assessment of the cost of repairs.  The Legislature should order the agencies to develop a methodology for assigning those costs to the farms creating the overdraft, subsidence and infrastructure damage.

Locals claim to want local management, but Sabelow shows us how  they’re using the characteristics of local government to prevent managing groundwater as long as possible.  People who work at the State level are far more insulated from the interpersonal nastiness and being thrown out of office.  That gives the State the valuable ability to change the default for locals, so that locals switch from delaying GSAs and opposing groundwater management to demanding that GSAs form already, to save them from those mad men at the State.



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More from Dr. Haddad’s Rivers of Gold.

Well, this is embarrassing. Not a couple pages past where I left off, Dr. Haddad goes into some inherent problems of water markets. His third chapter describes some problems inherent to markets, although not exactly the same list I gave. He describes the crux of the issue neatly on page 34:

With respect to natural systems, there is a critical variable that could turn potential environmental benefits associated with efficiency … into potential environmental disasters. It is the rate of growth in the use of the resources. Is the quantity of an economy’s resource use … stationary or growing? If it is stationary … and the issue is one of selecting a resource-allocation mechanism to utilized a fixed amount of available resource, than an efficient system (such as a market) probably would be neutral or perhaps would even benefit the ecosystem that supplies the resource. But if the level of the resource use is not fixed but instead is growing … then an efficient system could simply accelerate the consumption of a natural resource well beyond its sustainable yield. That is, assuming that no regulations limit the exploitation of natural resources, an efficient system will identify opportunities for profitable exchange involving natural resources more quickly than will an inefficient system, thereby accelerating the throughput of natural resources through the economy.

I have three main thoughts about this.

A. I am so mad that I haven’t read Dr. Haddad’s book before. I did myself a great disservice and inadvertently forced myself to derive my versions of similar thoughts by reading the news and thinking. I wouldn’t wish that on anyone, so I hope you will all read Dr. Haddad’s Rivers of Gold soonest.

II. I believe this is where the wave of Reisner water enviros is going down a different path than my own water environmentalism. I believe they had some unconscious assumption of a fixed pool of water in ag, and evidence of substantial irrigation inefficiency. They figured that with way better irrigation efficiency, there was plenty of water. Enough for ag to do what it had done before (the same amount, done more efficiently, because of market incentives!) and the cities to purchase some. Conserve and market, as a win-win! But that hasn’t been what happened. Better irrigation efficiencies have sometimes lead to using more water on the same land (and getting even more crop yield per unit water), but it is also leading to an expansion in irrigated acres. I am a couple decades younger and spent some time in the Valley, and I never saw any evidence that irrigation efficiency improvements led to taking less water out of rivers (although it does other good things and I am for it). That’s how I came to the conclusion that I’d rather fix the irrigated acreage by rules because I am Stalin.

3. That leads to my third thought, which gets back to almonds. Water is the limiting material for almond growth. Relative to water, both arable land and market demand are infinite. Nothing will push back against the drive to expand water availability for almonds except a decision to do that. Certainly a water market without regulations to keep the rate of use of water stationary will lead to more of what we’re seeing in this drought: non-stop luxury crop expansion, efforts to weaken or destroy the Endangered Species Act, drilling two thousand foot wells that collapse the ground surface, and demands to draw water from anywhere, the Trinity, the Columbia, from unicorns.

I really should have read Dr. Haddad’s book long before and I should revisit Daly and Cobb. My bad.


FOUR.  Australia’s water markets have this fixed availability of water built in to them. They’re one basin, with one river, well gauged.  The official yearly allocation from the single source really is all the water involved in the market.  California’s water sources are way the hell more mixed, unmonitored and indeterminate.  Unbundling Water Rights didn’t mention making sure that the market was only dealing with a fixed amount of water because they’ve never had to create that condition.  (Just like I didn’t rightly appreciate carriage water.)  The new PPIC recommendations don’t explicitly mention ensuring that markets are only working with a fixed supply, although perhaps they back into it by making sure of instream flows first.


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The disadvantages of water market allocations.

Blogging is an up-to-the-minute affair, second only to the Twitter.  Which is why I’m bringing you a quick observation about works published in 2000 and 2005.  I don’t mean global criticism by this; both works are very impressive, as well as clear and readable.  But since I just read one and started on the next, I can’t help notice a commonality.  The authors do not mention disadvantages of a market system.

“But On!” you say.  Right there on page four of the McCann paper, there is a heading that says “Advantages and Disadvantages of Water Rights Markets“.  Right!  That was what got me all excited for a listing of the disadvantages of water rights markets.  But two of the three items are obstacles to instituting a market (1, transaction costs and 3, third-party objections) and the second is a risk of poorly designed markets.  I am willing to grant market advocates well-designed markets, since I would like to be granted the possibility of well-designed regulation.

Haddad’s Rivers of Gold did the same thing to me (so far.  I haven’t finished it.).  There, on page 25, I read the header Arguments in Favor of Market-Based Water Reallocation.  Sure, no problem.  I read them and turned the page for arguments against market-based water reallocation.  Nothing!

There are genuine drawbacks inherent in the market model, even good, well designed markets intended to achieve a larger societal goal.  I will list them here so I can stop reciting them in my head.

  1. Water uses can have social values very different from the economic values that a market uses to allocate it.  When wealth inequality is as high as it is now in California, water will be bought by people whose uses will differ strongly from the social value for water.  An example might be Resnick purchasing his 150,000th acre of almonds before the city of Fairmead can afford drinking water.  If wealth were substantially more equal, the economic values of water and the social values of water would coincide more.  But that’s not where we are now.
  2. Individuals operating in a market are the wrong scale for decisions about selling water and retiring land.  Piecemeal land retirement imposes the fixed cost of conveyance on the remaining farmers.  Piecemeal land retirement also doesn’t select for preserving and maintaining the best engineered projects for future conveyance.  There are advantages of scale for planned ag land retirement (conversion to power generation or creating flood bypasses) that individual farm-based decisions to sell cannot create.
  3. People make terrible financial decisions that hurt themselves greatly all the fucking time.  Pervasive denial and innumeracy are widespread human traits.  Every market advocate I have ever seen has been a policy elite, trained to think abstractly and manage information.  Regular people get fucked over in markets.  At the CDFA Board meeting two times ago, a board member said that Australian farmers were told to sell their shares (the whole right) because they’d be able to buy yearly allocations.  They were never able to afford yearly allocations again.  They didn’t have the sophistication to evaluate that, followed the advice and feel robbed.  Americans have been trained to be callous and blame losers, but a system that doesn’t allow for denial and innumeracy is a bad system for humans.
  4. The flow of wealth from current water-needers to current water-havers is unjust.  There is no difference in moral worth between the people who do not have water rights now and people who were lucky enough that their great-grandparents claimed water.  People who have water rights now did not make that water by labor, or cleverly negotiate the water rights system with their smarts, or do anything that merits gaining wealth from non-rights holders.  Moving wealth from us to them for access to water is bullshit.

I have other different important objections.  The ones I listed are inherent to the market system.  We could combine a market system with other policies to ameliorate some of them.  But they are there and are worth spelling out.



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A lot of new almond orchards.

Seventy-two thousand new acres of almonds since June 2014.  Had the State Board implemented a “no new permanent crops in basins with declining groundwater levels” policy, the basins would be roughly 200,000 AF less overdrafted now.



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What would enhancing a California water market next year mean?

The next reason it is hard to apply techniques from Australia’s water market to California’s drought is that I’ve never seen a description of what California’s water market would be.  This isn’t my usual gripe about no-defined-goal.  Even among people who want a market just ’cause they know it would be so great, I haven’t seen a description of what that market would be.

Next year, if it is a dry Year 5 and we heed the calls for a water market, what would we do?

  • Intra-basin markets in the Sac Valley and the San Joaquin Valley?  Those already exist, to some extent.
  • More ag to urban transfers?  To whom?  City of Sacramento?  City of Porterville, on behalf of East Porterville?
  • More sales within each water project?  Sales between the water projects?

What is the extent of the hypothetical water markets for better drought management?  Is this all about Metropolitan Water District as a buyer?  Or the districts that lay low on the west side of the San Joaquin Valley (Lost Hills, Dudley Ridge), as buyers? Is this all about Feather River water going to LA?

The different potential markets could use different pieces of the conversion process to Australian-style water markets.  The first, less-mentioned, part of the Australian unbundling process for any type of market is setting instream flows and designating refuge water.  Without trying to revise water rights into shares and allocations by next year, markets within the major valleys or water project could be facilitated with centralized complete water diversion information, a centralized exchange board, and upstream (and possibly downstream) carryover storage.  But if “the market” that advocates really want is Sac Valley water for Southern California, then from what I read, we don’t need anything from Australia.  We need more conveyance capacity through the Delta.

Without an actual proposal for a market (the region, the scope, the type, the intent), I can’t say whether anything from the Unbundling Water Rights report could be helpful.  I don’t actually want to see water markets here, but if that’s where the momentum is going, we need some solid proposals.  How big?  WHY?  What mechanism?  WHY?  Where, whom?  WHY?  Why, for the love of god?  In small words about tangible things that people care about, WHY?!


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Trying to apply techniques from Australia’s water market is a mess.

I gotta tell you, I feel as if I’ve stumbled into quicksand.  I’ve accidently gone up a level of complexity, and can’t draw conclusions that I am sure of (I try to only write here when I trust my thought).  I keep reading more complex discussions of California water transfers and markets, which send me to other materials and when I come back to write, my draft posts all trail off into more reading.

I have started to draw some conclusions.

1. There are a few classes of water market advocates.

  • Oversimplistic economists who don’t know the water field but worship markets and feel sure that markets are the right answer for everything.  I don’t give a shit about them.
  • Economists who do know the water field extremely well.  I am puzzled by them, because they persistently ignore forty years of evidence that large scale markets keep not happening despite the longterm policy push.  They keep thinking that there are policy tweaks that could create a water market, rather than the likelihood that farmers would rather farm than sell water and that the transaction costs of moving water really are that high.  They believe in their economic theory more than they believe in what we observe in the world.
  • People who just want to get water away from senior rights holders (for environmental or urban use) and don’t care about the equity issues.  They think the water rights fight is unwinnable and spending urban money is faster.  But they don’t love markets, they just want any tool to accomplish their goals.

2.  Despite my own blog writings, I do not see social goals for a market in any pro-market advocacy piece.  There are goals for the market itself (lots of easy trades, send price signal, reduce inefficiency) but never anything like “create a stable farming community with high wealth equality” or “keep meat cheap because people like meat” or “put an end to urban landscaping”.  There is never a choice of a social goal, then an evaluation of the tools to achieve that, one of which is a market.  People who advocate for markets always start with markets, then list the things markets do (but not the ways markets make people’s lives shitty or even design criteria to prevent that.)

Now I will stop and post this, hoping that this leads me back into blogging that I can post.  I am still working on the question:

What, out of all the content in the Unbundling Water Rights, could be used here?  I’ve heard Tim Quinn say that he hopes for a big push on water markets if the drought continues, so this could be a very active topic next year.  What Australian magic can be applied here?  My first guess at the answer is “ignore third parties more”.


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