This lecture will discuss both surface water and groundwater allocation
issues. Surface water supplies are quickly replenished
by the hydrologic cycle, and can be treated as renewable
resources; groundwater supplies are replenished more slowly,
and some aquifers are replenished so slowly that they are essentially
exhaustible resources.
An efficient allocation of surface water resources equates
the marginal net benefits of water across competing uses.
If flows are variable, allocating fixed percentages to different
uses will be inefficiencient if competing demands have different
elasticities.
Example: A's WTP for water is 10 - 2Q; B's is 5 - 0.5Q. What
percents of a total flow of 10 units should be allocated to A
and B respectively so that their marginal WTP's are equal? (4
units or 40% to A and 6 units or 60% to B.) What percents of
a total flow of 5 units should be allocated to each to equate
their marginal WTP's? (3 units or 60% to A and 2 units or 40%
to B.)
Groundwater mining involves rising extraction cost (as
water levels fall) plus opportunity costs (foregone future
use benefits). If water demand is constant, the optimal use schedule
involves rising prices and declining consumption through time,
as with any other exhaustible resource. Economic depletion (where
MC rises above the demand choke price or the price of the backstop
resource) may occur before physical depletion (the aquifer is
pumped dry).
US water law varies by region. In the Western US, non-transferable
riparian water rights (rights were included in ownership of
streamside properties only) gradually gave way to a prior appropriation
doctrine (rights were allocated to prior users). The federal
government gradually supplanted outright ownership rights
with usufructory rights (use rights), and has provided
massive water subsidies since the 19th Century in order to stimulate
economic development of the West. The federal government has
paid for 70% of all Western water project construction and operation
costs; 81% of irrigation costs; and 64% of municipal water costs.
Western water use is inefficient because of (1) restrictions on
water transfers, (2) mis-pricing, and (3) common-property problems.
Beneficial use doctrines require users to make appropriate
use of their water, or lose their rights to it: this discourages
conservation. Preferential use policies allocate water
rights according to a bureaucratically-determined (not
market-determined!) hierarchy of uses, while the prior appropriation
doctrine allocates water within individual use categories. This
allocates risks of shortfalls inefficiently: since water supplies
to lower-ranked uses are unreliable, other investments in those
uses are discouraged.
About 90% of all water consumed in the West goes to irrigation
(which is heavily subsidized). Consequently, the MVP of irrigation
water is far lower than the MVP of water in most other uses.
Reallocations to higher-valued uses are prevented by regulation.
Water is generally priced very inefficiently. First, many water
utilities in the US charge a flat fee, which promotes waste
by imposing zero marginal costs on users. Others utilities
use declining block pricing structures, offering lower
unit prices to bigger users who then use more water at lower MVP
than smaller users. Second, regulators don't generally permit
water companies to incorporate marginal user costs (scarcity rents)
into their pricing.
Large groundwater aquifers involve a common-property externality:
each user's withdrawals increase pumping costs for all other users,
and any water conserved by one user is simply taken by the next.
Since users have no economic incentive to conserve water, the
aquifer is depleted too quickly.
Various reforms could improve water use efficiency in the West: