Returning to Mr. Lustgarten’s close look at water markets in practice, I am pleased that my three questions for prospective water markets would have predicted the success and failure of the examples. A reminder of the three questions:
- What social goal is the water market trying to achieve? That goal cannot be “have a real good market”. Water markets are tools, among other tools like regulation or planning, that can be used to achieve something. What is that thing for this specific proposed market?
- What is the built-in mechanism that ensures that the market is redistributing a fixed amount of water with economic efficiency, rather than efficiently drawing an open-ended amount of water out of the environment, the ground, and rural communities?
- What is the built-in mechanism for the Kaldor-Hicks compensation? The Kaldor-Hicks criteria says (roughly) that the water reallocation would create so much more value that the winners could compensate the losers (beyond or outside the sale itself). But that never actually happens, so I would want to see a mechanism for that built right into the market.
The answers for Crowley County, the example of a water market destroying small towns:
- No explicit goal. The implicit goal was to put a structure in place that allowed cities to buy water.
- No built-in mechanism for limiting the water sales to a fixed quantity of water. Cities were able to purchase all of the farming water in the county.
- No mechanism for Kaldor-Hicks transfers, so third parties got no compensation. The money directly from the water sales themselves seem to have mixed effect. The farmer and son-in-law quoted sound as if the money didn’t keep them as satisfied as farming and having a healthy town would have. But perhaps Mrs. Tomky and the children who used the money to move away were quite pleased by the sales. I don’t know how the utils balance out.
The answers for Palo Verde, the example of a transfer that looks like a success:
- The goal was to get some reliable water for MWD.
- The transfer water is limited to water from fallowed acreage, which is capped at 35% of each farmer’s holdings.
- MWD “has also invested $6 million in the community, to counter whatever economic harm might come from the fields’ temporarily drying up.”
My readers with water rights! Here’s what you do. If Mr. Deane approaches you to buy your water rights, do not let him make his pitch. Keep him at bay with a pointy stick and ask him those questions until you get answers you like. Do not sell your water rights unless you understand and you like the answers.