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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7 responses to “The disadvantages of water market allocations.

  1. First, since you referenced one of my papers, I’ll point out that I’ve also written another paper questioning whether a market structure is appropriate for allocating another environmental resource, international GHG allowances:

    On your first point, your problem isn’t with markets but rather with wealth distribution. And I agree that it is currently skewed and getting worse. But hobbling the ability of people to make decisions about how they want to use their resources is only a poorly-designed backdoor way of getting at that problem. A better solution might be shifting from an income tax to a wealth tax–a 2% assessment can replace the entire federal personal income tax. As for social value diverging substantially from economic value, I need more than an assertion to back that up. Certainly environmental restrictions represent a strong imposition of one set of social values. But that doesn’t mean a complete stop to trades, only reasonable constraints.

    On our second point, almost all water market transactions are between government water agencies–e.g., irrigation districts to municipal water districts or cities. These are rarely piecemeal trades by individual farmers. And in most cases those trades involve rotating fallowing or other means of spreading the fallowed acreage.

    Your third point seems to be that a paternalistic government should step in and make financial decisions for us. The fact is that the government isn’t particularly good about making broad resource allocation decisions. It’s the curse of the centralized single decision maker. We lose the portfolio effect of how some of us make good decisions and others make bad decisions; instead that single decision better be the correct one or we’re all in trouble. I blogged about how we ran the experiment with centralized economic planning and it failed miserably:

    And finally, you appear to have a problem with the entire property rights system and the intergenerational transfer of wealth. And again you’re correct that we fail to acknowledge that we don’t all start with the same endowments (both in property and genetically). And economist too often overlook the fact that our initial individual endowments affect our abilities to arrive at what are truly “efficient” outcomes that participants consider fair. But your objection does not just apply to water markets–in fact these markets are just a blip in the economy-wide market. In other words, you’re objecting to the basis of the entire American economy. But the solution is not to end the ability of individuals to make decisions for themselves; a much better solution is to give them a much better start through redistributed estate taxes and targeted education and training, among other efforts that aren’t currently happening.

    Even so, most of the current water rights holders have acquired those rights through property sales. The “multi-generation” farming family is the exception, not the rule, in the Central Valley. The value of those water rights have already been capitalized into the land purchase prices over the years, and those families have already gained the wealth. The horse is already out of the barn

  2. Blake

    If OtPR has a problem with the fundamental structure of the American (really, global) economy then they’re pretty in line with ol’ Pope Francis. Redistribution of water will require fixing many of the systemic problems of capitalism.

    • Then address the broader problems on the economy; don’t focus on one small corner in a way that will actually worsen environmental conditions, not improve them. Here’s an excellent rebuttal to the Pope’s misguided view on the use of incentive mechanisms to address climate change:

    • onthepublicrecord

      I’ve been thinking of it more as a way to fix a corner of the capitalist system; one way to reconfigure one type of wealth. In case we can’t wrench money back from the 1%, this is a way to take a different form of wealth back.

      It isn’t either/or. Both!

    • And you also want to take away one of the most effective tools for achieving environmental improvements. The fact is that efforts to collectivize resource use invariably leads to worsened conditions, not improved. That’s why the East German environment was so much worse than West Germany’s in 1990 when they reintegrated. Attacking market mechanisms is a very poor way to go toward wealth redistribution. It is badly misguided and will be counterproductive. The appropriate venue is through 1) the tax system and 2) strengthened safety nets. Interfering in a paternalistic way in individual transactions is a recipe for economic disaster. Just ask Eastern Europe and Russia. (Give me a valid empirical counterexample of where centralized decision making of individual resource allocations replacing a market system succeeded if you think otherwise; and not examples of where market failed.)

  3. Bill G

    Without doubt, The Market can efficiently allocate….within a rule based system. Untrammeled markets–including many advocated at–rarely result in optimal allocation. Even Mr. Smith warned:

    People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

    I think we can agree that The Market should have some constraints? Almost every market I can think of has elites manipulating the rules behind closed doors.

    (Indeed, staying on topic about water, many of us would support a new conveyance system if the plumbing were limited. Knowing the elites will make “plumbing” into “destiny” is precisely why we worry. But I digress.)

    Most The Market supporters arm wave constraints and try to keep the conversation on theoretical markets. (Clearing, with perfect information, perfect competition, no monopsony) They are quite happy to find all kinds of cynical, practical flaws with other allocation methods, but markets rarely get the same treatment.

    The best example of centrally planned allocation is Social Security. Left to The Market, humans radically underinvest in the future. (This also speaks to OtPR’s point three.) Individual allocation is a disaster…and that is even with elites privatizing the profit and socializing the risk. A large scale program based on the returns of the economy is the only safety net most people have. I know this flies in the face of the orientation at From the Reason point of view, the flaw is that Social Security also engages in redistribution.

    On capitalized water rights, I would like to know how much, exactly, did the Westside guys pay to the state for the _political_ allocation of (for example) the Trinity River to the system? These rights are indeed capitalized. But the allocation was not market based, and the over-allocation was not market based.

    We have to manage the political reality of the takings provision because our ancestors made a political allocation a property right. However, if a political allocation established the right, it may very well work to have a political reallocation, or a set of rules to constrain The Market.

    • Absolutely agree that markets must operate within a set of given rules (that are reasonable). (I only wrote that piece for RPPI, I don’t work for them. I also work on energy and GCC issues for EDF. I really don’t care what Reason thinks about other issues. So which camp am I in?) If you read my papers that have been cited here, you’ll see that I talk in detail about the constraints on and of the markets, and the importance of establishing certain rules. The “unfettered” markets crowd fails to acknowledge the need for strong government institutions to make markets actually work. We only need to look at places like West Africa to see how the lack of these institutions create chaos and corruption. Even China is having problems with this.

      And I’ll highlight a clear set of situations where market mechanisms probably fail–in addressing “bads” such as aging (e.g., Social Security which I agree) and healthcare. We don’t desire to get sick and demand more medical treatment, and poorer health is correlated with with less wealth and ability to pay. The market clearly fails in this case so much so that a strong government-managed safety net (and perhaps entire system management) is preferable.

      But using water is not a “bad”; it’s a “good.” And markets (which really-well defined property rights, which includes defining the public good boundaries) are better at allocating resources to the highest value uses than a centrally-dictated allocation mechanism.

      Elites probably do manipulate market rules, but our empirical experience is that this situation is even worse in centrally-controlled economies. The ability of a very small elite to satisfy their wants, and the idiosyncratic means to getting into that elite were among the many failings of those systems. (Again, I’ll refer you back to my blog post on that issue.) At least in a market, the elites must compete with each other more openly, and entry into that market is much easier. New technologies can disrupt those elite relationships. None of that is possible in a centrally-planned closed economy. And thinking that fundamental problem can be fixed is simply naive. Churchill’s quote “Democracy is the worst form of government, except for all the others” is equally applicable to market-based economies.