Throwing Out Government to Save the Bathwater

Water Crisis: Ending the Policy Drought, by Terry L. Anderson, Baltimore: Johns Hopkins University Press; Washington, D.C.: Cato Institute, 121 pp., $15.00/$7.95

Terry Anderson's Water Crisis provides an excellent introduction to "the new resource economics"—that body of work, increasingly well received, which brings together traditional economic insights, a regard for individual property rights, and a concern for the environment. Like Water Rights: Scarce Resource Allocation, Bureaucracy, and the Environment—the companion volume edited by Anderson and reviewed by Steve Hanke in the January REASON—Water Crisis is directed toward an academic audience. And while there is a need, as noted by Hanke in his review, for a more stimulating, popularly oriented discussion of these matters that might be more widely read, Anderson's new book does take an important step in showing how privatizing water resources could alleviate a potential water crisis.

Anderson begins by quoting government projections that forecast an impending water crisis in many areas of the country, particularly in the West. My own review of many of these same studies suggests that we are many years away from all but isolated water shortfalls, even if present policies continue. However, this is a minor criticism.

The real problem is not that we will be unable to take showers in a few years but that present policies waste billions of dollars in misallocated resources and necessitate the construction of ever more water projects. This is because, as Anderson points out, current policies keep water prices below "market-clearing" levels. In a market, the price of water would rise until the quantity demanded at such-and-such a price equaled the quantity that suppliers would sell at the price. But in the nonmarket of governments' water policies, the only way to balance supply and demand is to build more water projects to increase supply.

Most readers of REASON probably know that the federal and state governments subsidize water production in the West, keeping the price low, at taxpayers' expense. Perhaps less well known is that there used to be a body of laws in the West (referred to as the Appropriation Doctrine), which established a system of private rights to water. The rights were clearly defined, enforceable, and transferable, thus facilitating a market for water. Unique to the West, this system was developed by pioneers facing a relative scarcity of water. Anderson provides an excellent discussion of the system's evolution and how it differed from the Riparian Doctrine followed in the eastern United States.

Since some people never seem to know when they have a good thing going, however, the courts and politicians started tinkering with the Appropriation Doctrine. According to Anderson, people argued against a fairly pure system of private rights to water for several reasons.

First, they feared that one company could come to control the price of water in an area. Anderson finds no empirical basis for this claim and suggests that individuals could tap groundwater resources or form associations to impose a bilateral monopoly to overcome this potential threat.

Second, some argued that private markets would be unable to provide the necessary funds for large projects. This constraint, Anderson contends, would be unlikely to occur if a project looked profitable.

But the biggest objection to private markets is the problem that economists have dubbed "externalities." More on this later.

Anderson points to four basic restrictions on private water rights that have contributed to the present-day misallocation of water resources. The first is the requirement that unless water is applied to a beneficial use (such as agriculture), the right to a prescribed quantity of water will be lost. This not only encourages wasteful overuse but also keeps water prices low for prescribed beneficial uses. Water may be more valuable, say, in a coal slurry pipeline, but unless this is designated as a beneficial use, the right cannot be transferred. The second restriction is preferential use, which dictates a pecking order of uses (for example, manufacturing over agriculture) having little to do with economic value. Third, there are restrictions preventing transfers of water away from the water source so that water that is not consumed will replenish the ground source. Finally, federal reclamation projects restrict transfers of water and how water is used.

The most interesting chapters of Water Crisis address how to privatize instream flows (water flowing in streams, rivers, etc.) and how to resolve the "common pool" problem associated with groundwater resources. Both chapters consider the sticky issue of externalities.

Many people suggest that in a free-market setting, with instream flows privately owned, amenity or recreational uses of water would be given short shrift. Yet private, environmentally oriented groups such as the Nature Conservancy and Ducks Unlimited devote private resources to preserve these uses, which are threatened under the present system of political determination of water uses. Anderson points out that in Great Britain, instream flows have been privately owned for centuries.

Groundwater presents a classic common-pool problem, where many users have unchecked access to a depletable resource. When no rights are established, there is an incentive to pump faster than one's neighbor, which raises pumping costs and induces accelerated use to avoid even higher pumping costs tomorrow. Anderson lays out an excellent system for assigning property rights to groundwater supplies. Rights would be transferable to maximize efficiency and to induce the owners to consider the opportunity costs of using water.

Although Water Crisis may not divert the potential reader from other activities on a Saturday night, it is highly recommended reading. Perhaps Anderson still will meet Steve Hanke's challenge to write a popular book on the subject that everyone, even politicians and bureaucrats, will enjoy enough to grasp the insights of the new resource economics applied to water.

R. Bruce Den Uyl is a specialist in natural-resource policy.