Rent Water and Common Property Economic valuation of natural resources and problems with managing publicly held resources Grape prices High grape prices in 2000 caused conversion of oak woodland to grape production and subsequent decline in price Who gains or loses from a increase or decrease in grape prices Develop the concept of Rent Applicable to land water all scarce resources Concepts of rent 1 of 2 Contract rent payment by tenant for right to use owner s property Apartment Economic rent payment to a fixed factor above competitive rate of return payment for a good in excess of its cost of provision Fertile agricultural land Concepts of rent 2 of 2 Scarcity rent premium accruing to a factor of production because it is limited in supply Willie Nelson Quasi rent Short run profit that are competed away over time New Nat l Forest policy increases logging An economic model of rent 3 types of land A B C 1000 acres of each type With 1000 in inputs can produce A 500 bushels cost 2 00 bushel B 400 bushels cost 2 50 bushel C 250 bushels cost 4 00 bushel Current price 2 00 bushel Who gains from 2x price increase RentB 600 bushel RentA 1000 RentC 0 Farm A gains 1000 Farm B gains 600 Farm C break even Oaks lose 4 00 2 50 2 00 500 900 1150 Bushels A living wage What are the environmental and ecological effects of a living wage for agricultural workers in SB county Depends on How much workers produce on different types of agricultural land Think of workers labor as an input to production just like land fertilizer etc Very large labor supply With an effectively infinite supply of labor at current wage w Output L MPA MPB MPC wage LA L Labor L Rent to each land type Rents accrue to land type A because labor is more productive on land type A RentA Output L RentB RentC wage L Labor L With minimum wage Output L MPA MPB New wage Old wage L2 L With minimum wage 1 Employment 2 Rent 3 Type C out of MPCProduction env Labor L The economics of water Allocation balance between many users and limited resource Consumptive uses residential industrial agricultural Non consumptive uses fisheries recreational hydro electric power transportation Consumptive users in US Irrigation 39 Thermo electric power 39 Public supply 12 Industry 6 Livestock 1 Home 1 Mining 1 Commercial 1 Top 3 agricultural users State Acres flood 000 spray drip Californi 9 480 74 a 19 7 Nebrask 7 450 47 a 53 0 Texas 43 1 6 310 56 Agricultural vs municipal Agricultural water heavily subsidized Price 20 AF use 80 water in California Cost to supply 1000 AF Municipal water Price 300 AF Groundwater Largely unregulated open access resource few property rights difficult to enforce pumping laws The Central Valley Project The CVP carries water from Northern CA to southern CA Water rights for CVP water follow the land not the owner Which landowners gain from CVP Who gains from CVP Landowners that purchased property prior to CVP gain Prior purchase price of land did not capitalize the CVP water right Future price will capitalize that right Rent accrues to property that will obtain rights to CVP water Imperial Valley San Diego High profile water transfer proposed from Imperial Valley to San Diego Imperial Valley Desert agricultural poorest county in CA Vast water rights San Diego One of richest largely municipal high marginal value for water The economics of water transfer What does economics have to say about water transfer from agricultural uses to municipal uses Allocate a fixed amount of water between the 2 uses How do we know when allocation is efficient Equi marginal principle Efficient allocation U San Diego willing to pay this for 1st AF 1000 A Imp Valley willing to sell 1st AF for this DA 50 DU U0 U 0 A 100 A0 100 0 Limit water to control growth Some argue that we should limit transfers prev slide to limit growth in urban environments Economic solution If we want to limit growth should target growth directly e g development tax or TDRs That way get same outcome more efficiently Did they reach agreement Different marginal values should lead to large incentives for trade Imperial Valley was going to sell about 5 of water allocation to San Diego at price of around 300 AF Deal broke down Concerns over agricultural labor way of life California the Colorado R 7 states draw from Colorado Arizona Colorado California New Mexico Utah Wyoming and Nevada Dept of Interior CA has not lived up to sharing conservation obligations Saw Imperial Valley transfer as good thing If no deal slash CA entitlement from 5 2 MAF yr to 4 4 MAF yr Jan 1 entitlement reduced Allocation by prior appropriation Prior Appropriations First in time first in use Economists criticize open access systems because they lack specified property rights Prior appropriations gives property rights to agricultural users Is this an efficient way to allocate water between 2 consumptive users Prior appropriations Price Urban Supply S QA Ag users get first dibs consume QA units of water at price PA Urban buys QU at price PU PA PU so equimarginal principle fails Supply PU P PA DU QU QA Q DA DTotal Water