U.S. Water Rights History and Property Rights LawA Static Version of a Rate of Return ConstraintEconomic Characteristics of WaterExamples of Surface Water SystemsWater ManagementU.S. Water Rights History and Property Rights LawWater PolicyPrior Appropriation Water RightsThe Role of Water DistrictsHow the Need for Explicit Water Rights Might AriseChapter #16: Surface Water Economics Contents: Economic Characteristics of Water U.S. Water Rights History and Property Rights Law Riparian Water Rights Prior Appropriation Water Rights The Role of Water Districts Transition from Queuing to Markets Responses to Variability Water Projects and the Government Extra Stuff A Static Version of a Rate of Return Constraint How the Need for Explicit Water Rights Might Arise Economic Characteristics of Water Recall that economics is concerned with the allocation of scarce resources. Although water may seem relatively abundant from a global perspective, in some geographic locations water is quite scarce. Furthermore, in most areas, water of the appropriate quality is scarce. We can see that two important characteristics of water as an economic good are Location and Quality. Thus, society undertakes many large-scale and expensive investment projects in the attempt to exert control over the location and/or quality of water. Examples of Surface Water Systems Reservoirs and Dams Rivers and Lakes Drinking Water Supply Facilities Waste Water Treatment Facilities Irrigation Projects Hydroelectric Projects Transportation Canals Water ManagementWater management involves several related issues (see Figure 16.1) that include Water Provision, Storage, Conveyance (either by irrigation or by natural river systems), Allocation, and Quality Control. -2-Figure 16.1: Water Systems and Decision Junctions -3-Water provision is the economic problem of determining the optimal total supply of water. Due to variations in climate and weather, the total supply of water is usually somewhat uncertain. The cyclical nature of climate and weather results in the cyclical behavior of water dependent systems. Although water managers may not have complete control over the total water supply, they can: • adjust the location of the water supply (by conveyance) • adjust the timing of water supply use (by storage). Water allocation is the economic problem of deciding how the total supply of water will be allocated among potential users. There are many alternative (competing) users of water: Residential, Industrial, Agricultural, Forestry, Fisheries, Recreational, Hydroelectric, and Transportation. The first four are mostly consumptive users, meaning they withdraw water from the total water supply (a process generically known as “diversion”) and “consume” the water by: (a) transforming it into water vapor (where it is “lost” to the atmosphere) (b) letting it seep into the ground (c) significantly degrading its quality. These users treat water as a non-renewable resource. The last three are non-consumptive users. These users either leave the water in the water supply or return the water to the water supply. In either case, in general, they do not degrade water quality. • Fisheries use water as a medium for fish growth. • Hydroelectric users extract energy from the water. • Recreation may involve using water as a medium (example: swimming) and/or extracting energy from the water (examples: white-water rafting, surfing). These users treat water as a renewable resource. -4-U.S. Water Rights History and Property Rights Law Competitive markets for surface water often fail or may not exist because of the peculiar nature of surface water property rights, or "water rights." The development of water rights law in the United States paralleled the development of land allocation rules during the “squatter period” of U.S. history. United States: Land and Settlement Policy 1600-1700: Experimentation in developing appropriate technology. 1700-1800: Establishment of modes of agricultural production on the East Coast. 1800-1900: Movement to the West. Growth in agricultural output through increase in land use. Yield per acre stabilized. Overall, yields increased, but because settlements spread West. Very little biological innovation. Land allocated by first-come, first-own basis. Railroads lowered costs of westward expansion. We are now at the same point with water and air resources as we were 100 years ago with land, since air and water quantity and quality are becoming scarce. Water Policy Historically, water rights allocation in the United States has been based on legal property rights mechanisms known as queuing systems rather than on markets. Queuing systems are sets of laws defining property rights regarding who has priority to use water, when water may be used, how water may be used, and how much water may be used. Although queuing systems are still the norm in the United States, they are truly artifacts of the U. S. Homesteading. A queuing system is a use-it-or-lose-it system of water property rights based on the principle “first come, first serve.” A queuing system: • Assigns water rights according to the sequence of previous uses. -5-• Encourages the rapid use of a resources, the “Settle the West” mentality. Homesteading for land rights is equivalent to the queuing system. It is aimed to increase settlement with the lowest cost to the government. The main difference between the economic implications of a queuing system today and those of the Homesteading period is that, under conditions of water scarcity: Markets are the best mechanism for allocating resources! Queuing systems are not efficient because they do not allocate water across users in such a way as to balance the marginal benefits and marginal costs of water use. Although it appears that a slow move toward market-oriented mechanisms is occurring, queuing systems are still the norm. We next discuss two queuing systems commonly found in the United States. Riparian Water Rights (Developed in England) Areas adjacent to rivers, streams, and lakes are called riparian areas. Under common law, ownership of riparian land entitles the landowner to the use of the adjacent water on an “equal" standing with other riparian landowners. Each riparian landowner has the right to “reasonable use” of the water. A riparian