1
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Slide 1
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Economics, Water Use, and the Environment © 2011
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Slide 2
Lessons 1 & 2
• The basics: Is water an economic good?
– Fundamentals of economic reasoning:
• Scarcity, Choice & Cost
• Incentives
Lessons 3, 4,& 5
• Water Issues and economic reasoning
– Institutions shape incentives
• Property rights
• Rule of law
Lessons 6 & 7
• Transfer: econ. of water to econ. of environmental issues
– Dealing with externalities: Gov’t & markets?
– Solutions are found at the margin
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Economics, Water Use, and the Environment ©2011
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Slide 3
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2
Slide 4
Role Play: How Much Water Do You Need?
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Car Nut
Gardener
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Busy Executive
Parent of Triplets
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Economics, Water Use, and the Environment ©2011
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Slide 5
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New Water Policies
Role __________
Current Water Bill $10 - $25/month
Policy
Would Your water
usage change ?
If so, How?
What substitutions
would you make?
How would this
policy change your
water bill?
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The mayor asks
everyone to conserve
water.
The city changes
all water bills to a
flat $20 fee/mo.
The city changes all
water bills to a flat
$100 fee/mo.
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You are billed $1
per 1000 gal. used
You are billed 1¢
per gallon used
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Economics, Water Use, and the Environment ©2011
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Slide 6
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When is a basketball a substitute for water?
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When is a basketball a substitute for water?
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Economics, Water Use, and the Environment ©2011
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3
Slide 7
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When is coal a substitute for water?
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When is safflower a substitute for water?
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When is a broom a substitute for water?
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Economics, Water Use, and the Environment ©2011
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Slide 8
Economics, Water Use and the Environment
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Unit Goals:
 demonstrate the power of the economic way of thinking in
the context of environmental studies
 elevate the level of discourse on the environment from
accusation to analysis, from sin to issue
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Slide 9
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Is Water an Economic Good?
•
•
•
Is Water Scarce ?
Does people’s use of water reflect
rational choice?
Does people’s use of water
respond to incentives ?
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Economics, Water Use, and the Environment ©2011
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4
Slide 10
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Scarcity:
limited resources to satisfy unlimited wants and
needs forces choice
choice is necessary and imposes opportunity
costs
Rational Choice:
People choose the alternative THEY believe
offers the greatest benefits over costs
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Economics, Water Use, and the Environment ©2011
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Slide 11
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Incentives:
 rewards or punishments for behavior
Positive
Negative
Perverse
may be monetary, but frequently are not
price IS an extremely strong incentive
changing incentives changes behavior in
predictable ways
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FTE
Economics, Water Use, and the Environment ©2011
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Slide 12
Review
 Water IS an economic good:
– It’s scarce
• it has multiple uses, and one use entails giving up
another (opportunity cost)
– people’s use of water responds to incentives
• price is an extremely powerful incentive for people
to find and use substitutes for water
 How much water do you “NEED” ?
– It depends:
• on the circumstances
• on personal interests, tastes, and values
• On the price of water
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Economics, Water Use, and the Environment ©2011
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5
Slide 13
Why Would Anyone DO That?
QUIZ:
• A farmer in central California grows rice. Rice is grown
in flooded paddies.
• (Central California is a desert!)
• The water the farmer uses to flood the paddies is
delivered by a huge, expensive irrigation and canal
system.
• Typical crop irrigation is less than 50% efficient. Rice
growing in California is far less efficient than “typical”
U.S. agricultural irrigation.
• Other crops, requiring much less water, could be grown
in central California.
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Economics, Water Use, and the Environment ©2011
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Slide 14
What do we know about the farmer?
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Categorize the following statements as:
Likely to be TRUE
We don’t know
•
•
•
•
•
•
•
•
The farmer’s father grew rice and that’s all he knows how to do.
The farmer isn’t very smart.
The farmer is likely to agree to change crops when approached by
protestors from the “Keep Our Canals Full” committee.
The farmer is worried about getting enough water to flood the fields.
The farmer is a wasteful person.
The farmer grew up near a lake and likes having water around.
The farmer makes more money growing and selling rice than he
pays for the water to grow it.
If getting water to grow rice became more expensive, the farmer
would be more likely to consider doing something different to make
a living.
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Economics, Water Use, and the Environment ©2011
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Slide 15
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Economics, Water Use, and the Environment 2011
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6
Slide 16
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Property Rights
Key to Avoiding Environmental Conflict
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Economics, Water Use, and the Environment © 2011
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Slide 17
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• Property Rights are human rights to
resources that enable owners to
– use
– transfer
– exclude others from access
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Economics, Water Use, and the Environment © 2011
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Slide 18
Property Rights . . .
. . .are established by formal and informal rules
about the privileges and limitations on the
ownership, use, and transfer of goods and
resources.
• These rights are specified in statue, ordinance,
other legislation, court decisions (common law),
tradition, and custom
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Economics, Water Use, and the Environment © 2011
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7
Slide 19
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How “Ownership” Differs
Air in
here
idea
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air
view
water
Sort: What are the rules governing the privileges and limitations of
ownership, use, and transfer?
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Slide 20
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Characteristics of Full Property Rights
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well-defined
exclusive
transferable
enforceable
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FTE
Economics, Water Use, and the Environment ©2011
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Slide 21
Well-defined
?
Skateboard
Yes
Playground ball
???
Exclusive
?
Yes
Transferable
?
Yes
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Yes
Sometimes
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Water park or ski
lift ticket
Gun
Enforceable
?
Yes
Yes
Library book
NO
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Hamburger
Bottled water
Water in a
stream
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Economics, Water Use, and the Environment © 2011
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Slide 22
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BREAK . . .
BUT First
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Slide 23
M&Ms Activity
Rules:
1. “Claim” any number of M&Ms by writing the
number on your sticky note.
2. You will receive the number of M&Ms you claim IF
the total claims do not exceed the number in the
bag.
3. If the claims do NOT exceed the # in the bag, the
following prizes will be awarded:
• $20 for the biggest claim
• $15 for the 2nd biggest claim
• $10 for the 3rd biggest claim
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Economics, Water Use, and the Environment ©2011
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Slide 24
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Institutions
The ‘rules of the game’ shape
incentives and behavior
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Economics, Water Use, and the Environment © 2011
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Slide 25
United States (surface) water law
 Riparian (roots in English
common law)
 Typical in the East
 People who own land
along streams, lakes,
springs, etc., have a
right to “reasonable
use” of the water.
 Historical use
protected by (common)
law from new uses
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Economics, Water Use, and the Environment ©2011
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Slide 26
United States (surface) water law


Prior appropriation (first-in-time, first-in-right)
 Typical in the West - spontaneous response
to conditions)
 The first person to divert water (take it out
of the stream) and use it, has the first right.
 People who come after may claim water
that is left after the first user has fulfilled his
right.
“Ownership” of water rests with the state
 Water right is a use right only, and is
measured in cubic feet/second (C) or acrefeet (MT)
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Economics, Water Use, and the Environment ©2011
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Slide 27
United States (ground) water law
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• Origins again in English common law
• Variations state by state, but common themes
– Most often tied to land above
– Extraction for beneficial use
– Sometimes limited to “reasonable” use
– Extraction by one raises extraction costs of
others
– “Ownership” achieved only via extraction (rule
of capture)
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Economics, Water Use, and the Environment ©2011
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Slide 28
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Water is scarce – and becoming more so
•
Use-It-or-Lose-It (Forfeiture)
•
Salvaged Water Rule
•
Beneficial Use
•
Public Interest
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Economics, Water Use, and the Environment ©2011
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Slide 29
Property rights issues
• Limited transferability
– Sharply hampers environmental protection
– Stops H2O from going to most productive use
• Limited exclusion with groundwater
– Yields race to extract
– Overuse/early use of water
– Later, higher-valued uses ignored
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Economics, Water Use, and the Environment ©2011
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Slide 30
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Gold Miners
Abe and Bob are gold miners. Abe sets up his camp on a stream,
builds a sluice, and diverts water at 10 cfs (cubic feet per second)
through the sluice. Bob arrives one month later and builds his camp
upstream from Abe. His sluice uses 5 cfs of water.
• What if water rights are riparian?
prior appropriation?
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Economics, Water Use, and the Environment ©2011
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Slide 31
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Farmers
Anna is Abe's granddaughter. The family has expanded its holdings from
Abe's original claim along the stream to include 640 acres of cropland. Anna
grows alfalfa in her irrigated fields, and she could grow hay without irrigation.
Connie lives downstream and grows hay, but she wants to experiment with
vegetable crops. Vegetables require more water than is left in the stream
below Anna's farm.
1. What if water rights are prior appropriation and use-it-or-lose-it?
2. How would a salvaged water law affect the situation?
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Economics, Water Use, and the Environment ©2011
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Slide 32
Conservation
Unable to buy water from Anna, Connie sells most of her land and
experiments with a few vegetable beds. Connie's son Cameron tells
Connie that she could use one third less water if she would let him install
a drip irrigation system.
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.
1. What if the use-it-or-lose-it rule is in effect?
2. What if the salvaged water rule is in effect?
3. What if neither the use-it-or-lose-it or
salvaged water rules are in effect?
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Economics, Water Use, and the Environment ©2011
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Slide 33
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Environmental Amenities
A local environmental group is concerned because in dry years the stream
is so low that fish die by the thousands. They want both Connie and Anna
to leave more water in the stream. Suppose that the state has eliminated
its use-it-or-lose-it and salvaged water laws but defines "beneficial uses"
as mining, commercial, irrigation, electricity generation, and household.
1. What is the likely relationship between Connie and Anna and
the environmentalists?
2. How might the relationship change if the state adds
“conservation and recreation” to the list of beneficial uses?
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Economics, Water Use, and the Environment ©2011
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Slide 34
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Ground Water
Connie's cousin David lives in a different part of
the country. While most of his neighbors are
farmers, he has no fond memories of his
childhood on the farm, so he started a bottled
water company, pumping water from a huge
underground aquifer to his bottling plant. His
neighbors irrigate from the aquifer, and the
nearby town draws its water from the same
source. Recent studies show that 5 percent
more water is being taken from the aquifer
each year than returns from rainwater and
other natural sources. The city council has
asked all users to cut back their water use by
10 percent, voluntarily.
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Economics, Water Use, and the Environment ©2011
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Slide 35
Ground Water
1. If none of the rules on the chart is in effect—in other words, no
property rights to the water in the aquifer are defined—will David
abide by the voluntary cut-backs?
2. Suppose the city council puts a limit on the amount of water that can
be drawn from each well. What might David do?
3. Suppose a salesman offers to show David a way to reduce his use of
water by purchasing some new equipment for his plant. Is David likely
to buy? Explain.
4. Suppose the city council offers to sell David a portion of the aquifer.
What other property rights rules would encourage David to buy the
aquifer? What rules would discourage him from buying it?
5. Suppose David buys water rights to 15 percent of the aquifer. An
inventor offers to sell him a technology that will reduce his water
usage by 10 percent. What rules would encourage David to buy this
water-saving technology? What rules would discourage him from
Economics, Water Use, and the Environment ©2011
buying it?
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Slide 36
The Ruby River Mystery
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Why did trout die when it would have cost so little to save them?
•
•
•
•
•
In May, 1987, a 1.5-mile stretch of the Ruby River in Montana virtually dried up. A
winter of little snow, a dry spring, and heavy demand for irrigation reduced the river
flow.
Trout were stranded and eventually dried in pools that overheated.
Meanwhile, farmers apparently had plenty of water; up to six inches of water stood
in fields along the river banks.
The water necessary to save the trout was worth about $4,000. A large fishing and
conservation organization was willing to raise the money from its 50,000 members.
But in spite of an outcry in the media and the expression of concern by anglers and
environmentalists, nothing was done and thousands of trout died.
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Economics, Water Use, and the Environment ©2011
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13
Slide 37
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Clues:
•
Under the rule of prior appropriation, the water rights clearly belong
to the farmers.
•
Three of the farmers with land along the Ruby River are avid anglers,
but the rest are not.
•
The conservation organization is NOT headquartered in Montana.
•
Water law in Montana defined beneficial use in such a way that water
must be diverted (taken from) the stream in order for the user to
claim a right.
•
There was a severe drought in the northern Rocky Mountain region
in 1987-88.
•
In the western U.S., the technology for agricultural irrigation is, on
average, only about 50% efficient (meaning that up to 50% of the
water diverted for irrigation never gets to the crops; it is lost to
evaporation, leakage, etc.)
•
Montana water law included a use-it-or-lose-it rule.
•
Alfalfa, corn, and sugar beets are high water-use crops.
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Economics, Water Use, and the Environment ©2011
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Slide 38
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Economics, Water Use, and the Environment 2011
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Slide 39
Scenario
A small town lies at
the lower end of a
valley in which five
farmers raise some
market crops and hay
to feed their livestock.
The farmers, whose
families settled the
area in the 19th
century, irrigate their
fields with water from
a stream that flows
from the snowfields of
the mountains at the
head of the valley.
Most of the people in the town work for the farmers or supply goods and
services related to farming.
The exception is the Outfitter, a family-owned business that serves big game
hunters during the fall hunting season and bird hunters throughout the winter.
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14
Slide 40
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Everything was great . . . until
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Economics, Water Use, and the Environment ©2011
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Slide 41
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After a beautiful, dry winter
(which everybody loved –
not a single football game
was canceled at the high
school!), the river was low.
When the farmers opened
up the head gates to
irrigate their hay fields, the
river below town all but
dried up, and the water got
very warm. Soon, more
fish were floating belly-up
than swimming.
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Economics, Water Use, and the Environment ©2011
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Slide 42
Word spread and fishermen
began to cancel their vacations.
The Outfitters were panicky; it
looked like they would lose most
of their yearly income!
And then they got mad. “The
farmers didn’t have to irrigate,”
they thought. “Their hay would
still grow.” True, they would only
get 2 cuttings instead of 3, but
that wouldn’t hurt them as much
as the low water was hurting the
Outfitters! It didn’t seem fair.
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Economics, Water Use, and the Environment ©2011
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15
Slide 43
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Town Meeting
Roles: You will be either a farmer or an outfitter. (It is up to you
whether or not to share the information on your role card.)
•The challenge to your group is to solve the problem that is threatening
to disrupt your community.
•If you come up with a solution that I cannot improve upon, you get to
keep the prize I’ve put on your table. If I can improve on your solution,
your group forfeits the prize.
•The problem is immediate – now, this summer, here, in this town!
Don’t waste time with pie-in-the-sky solutions to fix the world for all
time.
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Economics, Water Use, and the Environment ©2011
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Slide 44
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“Rules of the Game”
• The farmers have the water rights under prior
appropriation.
• There is NO use-or-lose it provision in the law.
• There is NO salvaged water provision in the law.
• Beneficial uses include: diversion for agriculture,
industrial, mining, and domestic water supplies; and
in-stream use for recreation and conservation
(See handout)
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Economics, Water Use, and the Environment ©2011
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Slide 45
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A “Better” Solution Is One That:
• Makes the farmers better off without hurting
the fishermen
• Makes the fishermen better off without
hurting the farmers, or
• Makes both the farmers and the fishermen
better off
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Economics, Water Use, and the Environment ©2011
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16
Slide 46
The range of possibilities
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Farmers
$75,000
HIGH
Water
yrs.
Outfitters
$100,000
Farmers
$75,000
WATER
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Farmers
irrigate
Outfitters
$20,000
LOW
Water
yrs.
Farmers DON’T
Farmers
$50,000
irrigate
Economics, Water Use, and the Environment ©2011
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Outfitters
$100,000
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Slide 47
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The Range of Mutually Beneficial Solutions
WATER
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Farmers
$75,000
Farmers
irrigate
Outfitters
$20,000
LOW
Water
yrs.
$50,000
$25,000
difference
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$80,000
difference
Farmers DON’T
irrigate
Outfitters
$100,000
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Economics, Water Use, and the Environment ©2011
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Slide 48
Relying on property rights & the market
• Advantages include
– Reduce wasteful use of resource (air, water, view)
– Encourage “production” of more amenities
– Create information about values and costs of
environmental amenities
– Ensure allocation to highest valued use
• Some problems cannot (yet) be solved by markets, e.g.,
large scale climate change
• But emerging markets for water, fisheries, and air
pollution demonstrate huge potential gains.
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Economics, Water Use, and the Environment ©2011
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Slide 49
New Demand: In-stream Flows
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Economics, Water Use, and the Environment ©2011
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Slide 50
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Economics, Water Use, and the Environment 2011
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Slide 51
M&Ms Activity
Rules:
1. “Claim” any number of M&Ms by writing the
number on your sticky note.
2. You will receive the number of M&Ms you claim IF
the total claims do not exceed the number in the
bag.
3. If the claims do NOT exceed the # in the bag, the
following prizes will be awarded:
• $20 for the biggest claim
• $15 for the 2nd biggest claim
• $10 for the 3rd biggest claim
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Economics, Water Use, and the Environment ©2011
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18
Slide 52
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M&Ms
Activity
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Questions:
1. What was your thinking in making your “claim”?
2. Why did the total claim exceed the number of “fish”?
3. What incentives are created by the “rule of capture”?
4. Suppose the fishermen know that the fish stock is
declining and the fishery will collapse. How will they
change their behavior?
5. What is the cost of conserving?
6. How could we change the rules of the game to provide
incentives for conservation?
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Economics, Water Use, and the Environment ©2011
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Slide 53
“Tragedy of Commons”
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Garrett Hardin, ecologist, 1969
• Common property resource will be over-exploited
because:
– Incentive for individual to capture value before someone
else does
– Individual can’t prevent others from capturing value
• Attempts to mitigate tragedy of the commons will impose
different costs and confer different benefits on individuals
and groups
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Economics, Water Use, and the Environment ©2011
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Slide 54
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Economics, Water Use, and the Environment ©2011
http://vimeo.com/23564293
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19
Slide 55
the not-always-tragic commons
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Economics, Water Use, and the Environment 2011
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Slide 56
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Western Water Law
A Very Short Course
June 15, 2011
Bozeman Montana
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Laura Ziemer, Director
Trout Unlimited’s
Montana Water Project
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Bear Creek Above Irrigation
Diversion
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Economics, Water Use, and the Environment ©2011
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Slide 57
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Bear Creek - Below Irrigation Diversion
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Economics, Water Use, and the Environment ©2011
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Slide 58
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Economics, Water Use, and the Environment ©2011
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Slide 59
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Economics, Water Use, and the Environment ©2011
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Slide 60
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Economics, Water Use, and the Environment ©2011
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Slide 61
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Economics, Water Use, and the Environment ©2011
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Slide 62
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Economics, Water Use, and the Environment ©2011
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Slide 63
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The Pearl River – Water In or Water Out?
•Five farmers live along the upper reaches of the Pearl
River in the Oyster Valley.
•Each uses 10 acre feet of water, annually, for
irrigation. No flow is returned to the river.
•Water is appropriated under the prior appropriations
doctrine.
•Each farmer grows a variety of different crops under
different production methods. Assume that farmers
have no costs and no revenue if they cannot divert
water to irrigate.
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22
Slide 64
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Water Rights to 10AF - Year Established
Farmer
Water Right
(10AF)
Established
Irrigation
Value of
10AF water
Adams
1800
Brown
1810
Chavez
1820
Jones
1830
Smith
1840
$40,000
$10,000
$20,000
$30,000
$50,000
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•Assume that each farmer’s goal is to maximize his income.
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Oyster River – Annual Flow, Selected Years (Acre-Feet, AF)
Year
water
flow (AF)
1980
70
1982
50
1984
40
1986
30
1988
20
1990
10
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Economics, Water Use, and the Environment ©2011
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___________________________________
___________________________________
Slide 65
Water Allocation by Seniority
year
annual
AF
1980
70
1982
50
1984
40
1986
30
1988
20
1990
10
Farmer
Adams
1800
Farmer
Brown
1810
Farmer
Chavez
1820
Farmer
Jones
1830
Farmer Total
Smith Farmer
1840
Use
Lower
Reach
Flow
Total
Farm
Revenue
water
allocation
annual
revenue
water
allocation
annual
revenue
water
allocation
annual
revenue
water
allocation
annual
revenue
water
allocation
annual
revenue
water
allocation
annual
revenue
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
Slide 66
Water Allocation by Seniority
year
1980
70
1982
50
1984
40
1986
30
1988
20
1990
10
Farmer Farmer Farmer Farmer Farmer Total
Lower
Adams Brown Chavez
Jones
Smith Farmer Reach
1800
1810
1820
1830
1840 Use
Flow
water
allocation
annual
revenue
water
allocation
annual
revenue
water
allocation
annual
revenue
water
allocation
annual
revenue
water
allocation
annual
revenue
water
allocation
annual
revenue
10
10
10
10
10
40,000
10,000
20,000
30,000
50,000
10
10
10
10
10
40,000
10,000
20,000
30,000
50,000
10
10
10
10
0
40,000
10,000
20,000
30,000
0
10
10
10
0
0
40,000
10,000
20,000
0
0
10
10
0
0
0
40,000
10,000
0
0
0
10
0
0
0
0
40,000
0
0
0
0
Total
Farm
Revenue
50
20
$150,000
50
0
$150,000
40
0
$100,000
30
0
$70,000
20
0
$50,000
10
0
$40,000
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
23
Slide 67
___________________________________
• Is the outcome of prior appropriation fair?
• Is the outcome of prior appropriation desirable?
• Are there other methods of allocation that you
think would produce “better” (fairer, more
desirable??) outcomes?
• Why aren’t the other methods in use?
– (Hint: What are the current “rules of the game”?)
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment 2011
___________________________________
___________________________________
___________________________________
Slide 68
Water Allocation by Market (Assume Least-Cost Trade)
year
annual
AF
1980
70
1982
50
1984
40
1986
30
1988
20
1990
10
Farmer
Adams
1810
water
allocation
annual
revenue
water
allocation
annual
revenue
water
allocation
annual
revenue
water
allocation
annual
revenue
water
allocation
annual
revenue
water
allocation
annual
revenue
Farmer
Brown
1820
Farmer
Chavez
1830
Farmer
Jones
1800
Farmer Total
Smith Farmer
1840
Use
10
10
10
10
10
$40,000
$10,000
$20,000
$30,000
$50,000
10
10
10
10
10
$40,000
$10,000
$20,000
$30,000
Lower
Reach
Flow
Total
Farm
Revenue
50
20
$150,000
50
0
$150,000
___________________________________
___________________________________
$50,000
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
Slide 69
___________________________________
1. What is your water worth to you? ________
2. What would it be worth to other farmers to have your
water? (Hint: Does it matter what year it is?)
• Farmer Adams
___: $__________
• Farmer Brown
___: $__________
• Farmer Chavez ___: $__________
• Farmer Jones
___: $__________
• Farmer Smith
___: $__________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
24
Slide 70
year
water
1982
50
1984
40
1986
30
water
allocation
annual
revenue
water
allocation
annual
revenue
BEFORE
trade
low cost
trade
annual
revenue
AFTER
trade
water
allocation
annual
revenue
BEFORE
trade
low cost
trade(s)
annual
revenue
AFTER
trade
Farmer
Adams
1800
Farmer
Brown
1810
10
10
Farmer Farmer
Chavez
Jones
1820
1830
10
10
Farmer Total
Lower Total Farm
Smith Farmer Reach Revenue
1840 Use
Flow
10
50
0
$150,000
40
0
$100,000
___________________________________
$40,000 $10,000 $20,000 $30,000 $50,000
10
10 0
10
10
0 10
$40,000 $10,000 $20,000 $30,000
0
0
50,000
$10,000
-$10,000
$40,000 $10,000 $20,000 $30,000 $40,000
10
10
10
$40,000 $10,000 $20,000
0
0
0
0
___________________________________
$140,000
30
0
$70,000
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
Slide 71
___________________________________
“Rules of the Game”
• The farmers have the water rights under prior
appropriation.
• There is NO use-or-lose it provision in the law.
• There is NO salvaged water provision in the law.
• Beneficial uses include: diversion for agriculture,
industrial, mining, and domestic water supplies
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
Slide 72
___________________________________
A “Better” Solution Is One That:
• Makes some farmers better off without
hurting the other farmers
• Makes all the farmers better off
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
25
Slide 73
year
water
1982
50
1984
40
1986
30
water
allocation
annual
revenue
water
allocation
annual
revenue
BEFORE
trade
low cost
trade
annual
revenue
AFTER
trade
water
allocation
annual
revenue
BEFORE
trade
Farmer
Adams
1800
Farmer
Brown
1810
10
10
10
Farmer Total
Lower Total Farm
Smith Farmer Reach Revenue
1840 Use
Flow
10
10
50
0
$150,000
40
0
$100,000
___________________________________
$40,000 $10,000 $20,000 $30,000 $50,000
10
10 0
10
10
0 10
$40,000 $10,000 $20,000 $30,000
0
0
50,000
$10,000
-$10,000
10
10 0
10 0
0 10
0 10
$40,000 $10,000 $20,000
0
0
0
30,000
$10,000
___________________________________
$140,000
$40,000 $10,000 $20,000 $30,000 $40,000
low cost
trade(s)
annual
AFTER
trade
Farmer Farmer
Chavez
Jones
1820
1830
30
0
$70,000
___________________________________
0
50,000
-$10,000
$120,000
20,000 $20,000
___________________________________
$40,000 $10,000 $20,000 $10,000 $40,000
___________________________________
___________________________________
___________________________________
Slide 74
year
water
1986
30
1988
20
water
allocation
annual
revenue
BEFORE
trade
trade(s)
annual
revenue
AFTER
trade
water
allocation
annual
revenue
BEFORE
trade
trade(s)
annual
revenue
AFTER
trade
Farmer Farmer
Adams Brown
1800
1810
10
10
Farmer Farmer
Chavez
Jones
1820
1830
10
0
Farmer Total
Lower Total
Smith Farmer Reach Farm
1840 Use
Flow Revenue
0
30
0
$70,000
$40,000
$10,000
$20,000
0
$50,000
$40,000
+10,000
$10,000
+20,000 -$20,000 -$10,000
$20,000 $10,000 $40,000
0
$30,000
10
10
0
0
0
$40,000
$10,000
0
$0
0 $50,000
??????? +$10,000
$40,000 $10,000
0
___________________________________
___________________________________
$120,000
20
??????? -$10,000
$?????? $40,000
0
$50,000
$90,000 ??
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
Slide 75
New players in the game
Environmentalists
Recreational users
___________________________________
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
26
Slide 76
___________________________________
“Rules of the Game”
• The farmers have the water rights under prior
appropriation.
• There is NO use-or-lose it provision in the law.
• There is NO salvaged water provision in the law.
• Beneficial uses include: diversion for agriculture,
industrial, mining, and domestic water supplies; and
in-stream use for recreation and conservation
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
Slide 77
___________________________________
A “Better” Solution Is One That:
• Makes any farmers or non- farmers better off
without hurting the others
• Makes both farmers and non-farmers better
off
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
Slide 78
year
water
Farmer Farmer
Adams Brown
1800
1810
Farmer Farmer
Chavez
Jones
1820
1830
water
allocation
annual
revenue
BEFORE
trade
trade(s)
annual
revenue
AFTER
trade
Seller
Farmer Total
Lower Total
Smith Farmer Reach Farm
1840 Use
Flow Revenue
0
___________________________________
___________________________________
___________________________________
Buyer
Price
___________________________________
___________________________________
___________________________________
___________________________________
27
Slide 79
___________________________________
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
Slide 80
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
Slide 81
___________________________________
___________________________________
Property Rights
Pollution & the Power of Marginal
Analysis
___________________________________
___________________________________
Economics, Water Use, and the Environment © 2011
___________________________________
___________________________________
___________________________________
28
Slide 82
Water: Who Owns It?
___________________________________
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
Slide 83
Externalities:
Market Failure or Property Rights Problem?
• Markets usually allocate resources to their “best” uses.
– “Best” is the use with the greatest excess of benefits over costs.
• But sometimes, they don’t.
– A.C. Pigou called these instances“market failure.”
• The Economics of Welfare (1920): market failure occurs
when all the benefits or costs of an exchange are not
captured in the exchange.
– Ronald Coase - The Problem of Social Cost (1960)
• If property rights are well-defined, enforced and transferable,
the affected parties will reach a mutually agreeable outcome
• The presence of “externalities” must reflect a failure to define,
enforce, or permit transfer of property rights.
___________________________________
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment © 2011
___________________________________
___________________________________
___________________________________
Slide 84
Negative Externalities
___________________________________
___________________________________
___________________________________
Costs of producing & consuming that spill over
onto people who don’t receive the benefits.
FTE
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
29
Slide 85
Positive Externalities
___________________________________
___________________________________
___________________________________
Benefits of producing & consuming that spill
over onto people who don’t bear the costs.
FTE
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
Slide 86
Marginal Analysis
Margin = Additional or Next
• Marginal cost = the cost of the next unit of production
• Marginal benefit = the benefit received from the next
unit of production
Propositions:
• Real life is an exercise in marginal thinking. We rarely
make “all-or-nothing” decisions.
• We tend to forget marginal analysis in public discourse.
• Pollution is NOT and all-or-nothing problem
– How much is the next unit of cleanliness worth to us?
FTE
___________________________________
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
Slide 87
Pollution Clean-Up Problems
Background concepts:
• Externality: pollution is a negative externality.
It’s difficult to clean up when property rights are
unclear. Once property rights are clear, then the
question for the owner of those rights is: “How
clean is clean enough?”
• “No pollution” isn’t an acceptable or realistic
answer.
– Pollution is the result of production
– There’s a cost to NOT polluting
FTE
___________________________________
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
30
Slide 88
Activity: Would YOU Swim There?
• The pond belongs to the
Homeowners Association.
• Homeowners Association
members will bear the cost and
reap the benefits of any clean-up
of the pond.
• Every family in the community
pays homeowners association
dues. Dues are charged per lot,
and are not dependent upon the
size and location of the lot, nor
the value of the home.
FTE
___________________________________
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
Slide 89
Bid Stage 1: Improving the View
Cost: $1 million:
• Remove the junk – vehicles, construction debris, leaking
barrels, etc.
• Replace the fence with better and more attractive barrier
• Restrict access to shoreline to entice birds and other
wildlife
Anticipated benefits:
• Lower insurance for homeowners association (est. $500,000)
• Increased property values in entire community by $2.5 to
$3 million
• Increase recreational and aesthetic values by about
$10,000 - $20,000
___________________________________
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
Slide 90
Stage 5: Clean Enough to Drink
___________________________________
Additional cost over stage 4: $1 million
• Install filtration system
• Install pump
___________________________________
Additional benefits: (notice that these are marginal
benefits – in addition to . . . )
• Reduced dependence on city water supply and potential
rebate from city of $50,000 - $150,000
• Increased property values in entire community by $0 $.25 million
___________________________________
FTE
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
31
Slide 91
___________________________________
Bid for complete clean-up:
Project
stage
pollution
removed
Total
cost
(in $)
1
40%
$1 m
Walking, picnics, wildlife
viewing, dog run
$3-4 m
($3.5 m. avg.)
2
65%
$2 m
Skating, hockey, boating
$5-6 m
3
80%
$3 m
Fishing and ice fishing,
greenbelt irrigation, garden
irrigation
$6-7 m
4
90%
$4 m
Swimming
$7-7.5 m
5
95%
$5 m
Drinking water
$7.25 - $7.5 m
%
Total Cost = $ 5 million
Results: Possible Uses
$ Estimate of
Total Benefits
Total Benefit = approx. $7.5 million
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
Slide 92
Interest Groups
•
•
•
•
•
•
•
FTE
Homeowners Association Board
The Fish
TP2― (Tired of Teen-Agers Tee-Peeing)
Boosters
PPP – Pond Perimeter Property Owners
KPK ― (Keep Our Property Kleen)
Out-of-Sight, Out-of-Mind
___________________________________
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
Slide 93
Discussion Questions
(remember your role)
For each proposed level of the project:
1. How much additional cost does the community pay for each level of
clean-up?
• Who bears this additional cost? (do you ?)
2. How much additional benefit does the community gain by paying for
this level of clean-up? (Look both at the $ amount of the benefits
AND check the project description to see what the benefits actually
are.)
• Who gets the benefit? (Do you? How much?)
3. Is your group willing to support this level of cost in return for this
benefit? Why or why not?
___________________________________
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
32
Slide 94
___________________________________
Marginal Analysis
%
Project pollution
stage
removed
Additional
Pollution
removed
Total
cost
(in $)
Marginal
Cost
$1 m
$1 m
$
Estimate
of
Total
Benefits
1
40%
2
65%
$2 m
3
80%
$3 m
$6-7 m
4
90%
$4 m
$7-7.5 m
5
95%
$5 m
$7.25$7.5 m
FTE
40%
$3-4 m
Marginal
Benefit
___________________________________
$3.5 m
$5-6 m
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
Slide 95
___________________________________
Marginal Analysis
%
$
Project
stage
pollution
removed
Additional
pollution
removed
Total cost
(in $)
Marginal
Cost
Estimate
of
Total
Benefits
Marginal
Benefit
1
40%
40%
$1 m
$1 m
$3-4 m
$3.5 m
2
65%
25%
$2 m
$1 m
$5-6 m
$2 m
3
80%
15%
$3 m
$1 m
$6-7 m
$1 m
4
90%
10%
$4 m
$1 m
$7-7.5
m
$.75 m
5
95%
5%
$5 m
$1 m
$7.25 $7.5 m
$.25 m
___________________________________
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
Slide 96
How do we
prevent
externalities?
___________________________________
___________________________________
(government failure ????)
Institutions matter: Property Rights are the rules of the game
Role for government:
1. Clearly define property rights
2. Enforce property rights and secure them through the common law
• private tort law in which those who inflict harm on others must
stop and make whole
3. Create an enabling legal framework in which property rights are
exchangeable
___________________________________
___________________________________
Economics, Water Use, and the Environment ©2011
___________________________________
___________________________________
___________________________________
33
Slide 97
___________________________________
___________________________________
Unit Goals:
 demonstrate the power of the economic way of thinking in
the context of environmental studies
 elevate the level of discourse on the environment from
accusation to analysis, from sin to issue
It’s not the people; it’s the system.
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________