Title: Concepts Used as Economic Criteria for a System of Water Rights
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CONCEPTS USED AS ECONOMIC CRITERIA
FOR A SYSTEM OF WATER RIGHTSt
by S. V. Ciriacy-Wantrup*




1. ECONOMIC CRITERIA "IN" AND "FOR" WATER LAW

Economic criteria are frequently implied in statutes concerned with
water law, in judicial creation of water law through decisions in individual
cases of controversy, and in administrative regulations by executive agen-
cies-criteria "in" water law.' Well-known examples are concepts like
"reasonable" and "beneficial" use, "waste," "surplus" of water, "maximum
development," and "adequate compensation." A semantic analysis, from the
economic point of view, of these and similar concepts would be interesting
and useful. But this is not how I propose to interpret my topic-or rather,
an analysis of criteria "in" water law appears to cover only one aspect of
the assignment.
Economic criteria are also common in semipopular and technical dis-
cussions, both in law and economics, when a system of water rights is con-
sidered as a whole-criteria "for" water law. In this country, there are
mainly three of these systems. First, in the eastern states, water rights
are based on the riparian doctrine-with modifications in some states as,
for example, North Carolina. Second, in the Great Basin and Mountain
states, water rights are based on appropriation. Third, around the fringes
of this heartland of the appropriation doctrine, the prevailing system of
water rights is a "blend" exhibiting features of both doctrines-although
in secular perspective the appropriation doctrine appears in the ascend-
ency; this blend prevails in the Pacific Coast and the High Plains states.
In appraising these systems of water rights, a dichotomy of criteria
is mainly used. One criterion is exemplified by a set of concepts such as
"security," "protection," and "rigidity" of water rights. The other cri-
terion is represented by concepts like "flexibility," "adaptability," and
"insecurity." Anyone familiar with the literature cannot fail to become
impressed by the vagueness, plasticity, and contradiction which charac-
terize the use of these concepts. An examination of their economic mean-
ing is needed.
This dichotomy of criteria is applied jointly. In examining its applica-
tion, one has to explore the gradations on the logical axis between the two
poles and the resulting compromise in institutional arrangements. But

*Professor of Agricultural Economics, University of California.
$Giannini Foundation Paper No. 154.
1. "Water law" will be interpreted here broadly to include contributions by the
legislative, judicial, and executive branches of government.






532 LAW OF WATER ALLOCATION

also, one has to examine to what extent the two criteria can be applied to-
gether without such a compromise.
The consequences of institutional arrangements, if viewed over time,
are complex. Applying a logical polarity to relations in reality does not
always give a perfect "fit." Although it frequently happens-examples will
be given below-that a change in institutional arrangements results in an
increase in terms of one criterion and a decrease in terms of the other,
this does not always happen. In other words, that the two criteria are poles
logically does not necessarily mean that a change in institutional arrange-
ments cannot be considered that results in increases in terms of one cri-
terion without changes in terms of the other or that results in increases
(decreases) in terms of both. In this, and in other aspects, our dichotomy
is similar to that of "order" and "freedom" which has occupied students
of jurisprudence for a long time and is not being neglected by economists
of quite different "schools."2
The two criteria imply a problem area which is one of the most im-
portant and difficult both for economic theory and policy. This is the
problem area of "economic change" and of "dynamics" versus "statics"
in economic discourse. This area is also the one in which the relations
between law and economics raise some of the most acute and baffling is-
sues.3 Thus, focusing on these two criteria brings us to the core of the
main theme of this symposium.
Focusing on economic criteria used "for" water law does not mean that
economic criteria used "in" water law (referred to in the first paragraph)
are to be neglected. Both can be regarded as means of serving a common
end-the "public interest." The public interest is the concept that connects
criteria "for" with those "in" water law. Examining the economic mean-
ing and implications of the former is not without relevance for the latter.
In examining concepts as criteria, the emphasis of this paper is on
functional relations in economics, not on legal history or on normative
meanings in law. The significance of the case law in this country is im-
pressive-especially to one,' as the present writer, who grew up in the
legal climate of the Code Napoleon and its successors. But tracing his-
torically the interpretation of economic concepts through the maze of case
law is more a task for a student of law than for an economist. Likewise, it
would be presumptuous for an economist to suggest how economic concepts
should be interpreted in law.
2. Commons, John R., Institutional Economics (New York: The Macmillan Com-
pany, 1934). Knight, F. H., Freedom and Reform (New York: Harper and Brothers,
1947) and The Economic Organization (New York: A. M. Kelley, 1951). Robbins,
Lionel, "Freedom and Order," Economics and Public Policy (Washington, D.C.:
Brookings Institution, 1955). (Brookings Lectures, 1954.)
3. See: Ciriacy-Wantrup, S. V., "Some Economic Issues in Water Rights,"
Journal of Farm Economics, vol. XXXVII, no. 5, December, 1955, pp. 875-885.






ECONOMIC CRITERIA IN WATER RIGHTS


A great deal is being written lately on the "integration" of law and eco-
nomics. If by this term is meant that students in the two disciplines need
greater understanding for each other's problems, tools, and limitations,
one can wholeheartedly agree. If it is suggested by this term that concepts
and processes of concept formation employed by economists should be
transplanted to law (and vice versa), the prospective benefits would seem
dubious. On the other hand, emphasis on the functional relations of con-
cepts used as economic criteria "for" and "in" law may help in clarifying
areas of common interest between two social science disciplines.
The "functional relations" to be studied in this paper may be indicated
by two closely connected questions: First, one may ask, what are the eco-
nomic implications-in the sense of logical and probable factual conse-
quences-if concepts used as criteria "for" and "in" water law are inter-
preted and applied in certain ways. Second, one may ask, how far and why
are these implications helpful or obstructive if certain economic objectives
are sought. The economic interpretations and objectives selected should,
of course, have relevance for actual problems of public water policy.
Although indicated by these questions, it may be well to point out explic-
itly at this time that the problem at hand will be viewed as one of positive
rather than normative economics.4 The consequences of this approach for
the relations between economics and law will become apparent later (Sec-
tion 6).


2. INTERPRETATION OF "SECURITY" OF WATER RIGHTS

To the economist, "security" of water rights means something different
and much broader than their "protection" means to the student of law. The
latter concept merely means protection against unlawful acts by others-as
such acts are construed by the law. Such protection is always subject to the
two major categories of "legal uncertainty," that is, to "rule uncertainty"
and to "fact uncertainty."s Legal uncertainty, in this sense, is a charac-
teristic of judicial decisions. Like other types of uncertainty, it also affects
economic decisions.
Economists are inclined to disregard or underestimate the significance
of legal uncertainty. For them, security of a water right connotes (1) pro-
tection against what I propose to call "physical uncertainty," that is, against
variability over time of the quantity of water usable under the right due to
seasonal or annual variability of "natural" run-off and ground-water recharge,

4. For a discussion of this differentiation see: Friedman, Milton, Essays in
Positive Economics (Chicago: University of Chicago Press, 1953).
5. This terminology has been popularized by Frank. See: Frank, Jerome, The
Law and the Modern Mind (6th ed.; New York: Coward McCann, 1948).






534 LAW OF WATER ALLOCATION

and (2) protection against what I shall call "uncertainty of water tenure"6
or, for short, "tenure uncertainty," that is, protection against variability
over time of the quantity of water usable under the right due to lawful acts
of others-who may be individuals or groups, private or public.
We are concerned here with the relative degree of security resulting
from different types of rights. Absolute security, that is, transformation
of probabilities into single-valued expectations, cannot be obtained through
water law. Furthermore, we are not concerned with the many other types
of uncertainty which affect economic decisions-for example, uncertainties
connected with variability over time of wants, technology, prices, and in-
comes. A few examples may illustrate differences between water rights if
"security" is interpreted in the way just indicated.7
Under natural conditions, a senior appropriative right is more secure
than a junior appropriative right against physical uncertainty but not nec-
essarily against tenure uncertainty. A water right in a high preference
class is more secure than one in a low preference class against tenure
uncertainty but not necessarily against physical uncertainty. A water right
restricted by reservations in favor of other users is less secure than these
other rights against tenure uncertainty but not against physical uncertainty.
An appropriative right is more secure against tenure uncertainty than a
riparian right or a ground-water right under the correlative rights doc-
trine-assuming that only one system of rights applies to a water resource.
Against physical uncertainty, however, an appropriative right is not nec-
essarily more secure than a riparian or correlative right; this holds es-
pecially (but not solely) for a junior appropriative right.
In all these examples, the two main categories of legal uncertainty are
also present. The degree of legal uncertainty may be quite different for
different water right systems and individual water rights. For purposes
of this paper, however, it is meaningful to proceed "as if" the degree of
legal uncertainty were approximately the same.
If one speaks of "quantity of water usable" under a water right, one
implies certain characteristics with respect to water quality. Over time,
water quality is also subject to legal, physical, and tenure uncertainties.
When water rights are defined in quantitative terms-as under appropria-
tion and through adjudication under the riparian and correlative rights
doctrines-reference should always be made to water quality.
Security of water rights in terms of water quality is no less significant

6. Tenure uncertainty is not confined to water-and other "fugitive" resources-
but is one of the most important economic forces affecting resource use. See:
Ciriacy-Wantrup, S. V., "Capital Returns from Soil-Conservation Practices," Jour-
nal of Farm Economics, vol. XXIX, no. 4, pt. 2, November, 1947, pp. 1181-1196.
7. For these examples, one assumes, of course, "other things being equal," that
means in this case physical conditions and legal features other than those under
consideration being the same.






ECONOMIC CRITERIA IN WATER RIGHTS


economically than security in terms of water quantity. Frequently, the
higher water uses-in terms of average value product-require a higher
quality of water than the lower uses. Furthermore, quality and quantity
are directly interrelated: water of high quality-in terms of low mineral
content, especially sodium and sulphates-can be reused, sometimes for
more than one cycle. Such water can also be used to upgrade surface and
ground water of lower quality which could otherwise be used only for lower
uses or not at all. These interrelations of quality and quantity are especial-
ly significant when water must be transported over great distances. Such
transport may be economically feasible only for high quality water. It fol-
lows, from the interrelations of quantity and quality just explained, that in
setting minimum standards for water quality, problems of reuse of the same
water and upgrading of other waters need to be considered. Minimum stand-
ards based on suitability for one cycle of direct ("unmixed") use alone may
be, economically speaking, too lenient.
Sometimes, the only security of water rights in terms of quality is their
protection against unlawful acts of water pollution (including for purposes
of this paper, contamination and nuisance). In many states, antipollution
laws are being strengthened. More federal action is also being considered.8
Dealing specifically with these attempts would require a separate paper.
Physical uncertainty can be significantly reduced through physical means,
that is, mainly through storage of water-above and below ground-from
season to season, from year to year, and over a period of years. A reduc-
tion of physical uncertainty in this sense produces benefits for water users
and others. Whether these benefits are "net" depends on the costs of con-
structing, maintaining, and managing storage.
A system of water rights may impede construction of storage facilities
by limiting development to the; "safe yield" of a water resource and by
making cyclical management of storage capacity and coordination of sur-
face and subsurface storage more difficult.
The appropriation doctrine can easily be used to limit water develop-
ment. In several western states, this doctrine has actually been used with
this objective and result in the case of ground water. With respect to sur-
face water, the actual facts are somewhat different. Most western surface
waters are "overappropriated." Sometimes, appropriation covers a mul-
tiple of the average flow during the season of use.
After storage capacity has been provided and is managed with a view to
reducing physical uncertainty, the relative economic status of appropria-
tive rights changes without changes in their relative legal status. Priority

8. The federal government is no newcomer in this field. See, for example, the
legislation known as the Caminetti Act [27 U.S. Stat. at L. (1893), 507, as amended
by 30 U.S. Stat. at L. (1898), 631; 30 U.S. Stat. at L. (1899), 1148; 31 U.S. Stat. at L.
(1900), 631; 34 U.S. Stat. at L. (1907), 1001; 48 U.S. Stat. at L. (1934), 1118; 52 U.S.
Stat. at L. (1938), 10401.






536 LAW OF WATER ALLOCATION

in time, in conjunction with the quantitative definition of appropriative rights,
limits the number of rights that can be served with the regulated flow. Rights
exceeding this flow become, economically speaking, less meaningful the bet-
ter the flow is regulated. For rights that can be served with the regulated
flow, the new situation, in terms of economics, is not greatly different from
that prevailing under a water delivery contract where a limited number of
users are equal in right-although the quantities to which their contract en-
titles them may differ.
Thus, the differentiation of water rights, so characteristic for the appro-
priation doctrine, has undergone a shift in its economic implications: with-
in limits, a junior right is no longer less secure against physical uncertainty
than a senior right. Increasingly, storage is provided by large public or
semipublic projects and managed by government agencies-public districts,
state water departments and boards, and federal bureaus.
In contrast to appropriation, riparian rights are coequal in law.9 An
economic implication of this equality is that their legal status is not a cause
for differentiation with respect to their security against physical uncertainty.
'This holds both for the riparian right to surface waters, as it is generally
applied in the eastern states, and for the application of the riparian right to
ground water through the correlative rights doctrine as, for example, in
California.
This lack of differentiation on the basis of legal status does not neces-
sarily mean that there are no differences between individual riparian or
correlative rights in security against physical uncertainty. Applying legal
equality through adjudication to a given stream system or ground-water
basin is a time-consuming and costly process. For a while, at least, in-
dividual riparian and correlative rights may differ in security against
physical uncertainty. Such differences are caused not by legal but physical
facts such as relative location of diversions along a surface stream and the
location of wells with respect to the source of recharge and the geologic
characteristics of a ground-water basin.
Differences between individual water rights (and between water-right
systems where they exist side by side in the same general area) in security
against physical uncertainty may obstruct or retard construction and coordi-
nated cyclical management of storage. Individuals and groups who "have"
greater security may be reluctant to join those who "have not" if a portion
of the costs of reducing physical uncertainty is incident on the former.
There are a number of institutional approaches to this problem. One
approach is based on a type of public district through which water rights
are acquired, or which acts as agent in utilizing them, for coordinated
cyclical management of surface and ground water. This approach is now

9. They are coequal within the two traditional preference classes of "natural*
and "artificial' uses-except that an upstream user need not share with downstream
users if the flow of the stream is only sufficient to satisfy his own natural uses.






ECONOMIC CRITERIA IN WATER RIGHTS


being investigated in our ground-water studies0I for Santa Clara County,
California. In many parts of the West, water demand is increasing so
rapidly that the group of "haves" (in terms of security of water rights
against physical uncertainty) is becoming smaller absolutely and, of course,
even more so relative to the number of "have nots." The formation of pub-
lic districts and of other institutional arrangements for coordinated water
management is thereby facilitated.
Turning now to security of water rights against tenure uncertainty, it
was mentioned earlier that appropriative rights are more secure in this
respect than riparian rights or ground-water rights under the correlative
rights doctrine. The former are clearly defined in priority, quantity, period
of use, points of diversion, and in other ways. The latter are coequal, and
quantitative definition depends on adjudication which is in terms of shares
and subject to the restriction that there shall be reapportionment if the con-
ditions upon which the original apportionment was made change sufficiently
to justify it.
There are, however, several factors which modify such a general com-
parison of water-right systems. The first factor is prescription which
operates under all water-right systems-with some differences in economic
significance (Section 4). The second factor is differentiation of preference
S classes based on purpose (kind, type) of water use. This factor also oper-
ates under all water right systems but under appropriation only before
rights are vested and under emergencies. Customary preference classes
are "natural" and "artificial" under the riparian doctrine and "domestic,"
"municipal," "industrial," "agricultural," and "recreational" under appro-
priation. The third factor is a restriction ("reservation") on water rights
to yield to future water demands by others. This factor operates only under
appropriation and affects future (not already vested) rights. Water reserva-
tions are frequently used in favor of certain preference classes. But the
connection with preference classes is not a necessary one. In California,
water reservations in favor of whole regions are in force regardless of
preference class.
There can be little argument on economic or any other grounds that


10. Smith, Stephen C., "Problems in Using the Public District for Ground-Water
Management," Journal of Land Economics, Vol. XXXII, No. 3, August 1956.
For other studies in this series, see:
Bartz, Patricia McBride, with a foreword by S. V. Ciriacy-Wantrup, Ground
Water in California, The Present State of Our Knowledge (Berkeley: University of
California, College of Agriculture, Agricultural Experiment Station, September,
1949), 67p. (Giannini Foundation Ground Water Studies No. 1.) Processed.
Snyder, J. Herbert, with a foreword by S. V. Ciriacy-Wantrup, Ground-Water
in California, The Experience of Antelope Valley (Berkeley: University of Califor-
nia, Division of Agricultural Sciences, Agricultural Experiment Station, February,
1955), 171p. (Giannini Foundation Ground Water Studies No. 2.) Processed.






LAW OF WATER ALLOCATION


domestic and municipal uses deserve special consideration as far as secu-
rity against tenure uncertainty is concerned. This type of use can frequently
prevail over other uses by eminent-domain proceedings. Still, the highest
preference ranking and water reservations in favor of this use are desirable
because other uses, for example, agricultural, may also be organized as
public districts. By adequate requirements for the treatment of sewage, do-
mestic and municipal use can be made largely nonconsumptive. Agricul-
tural use, on the other hand, is largely consumptive.
An economic argument can be made in favor of abolishing the usually"I
lower preference rating of industrial uses relative to agricultural. The av-
erage 12 value product of consumptive use is higher in industry than in ag-
giculture. Furthermore, in the western states, total consumptive use in
industry-although increasing-is still relatively small as compared with
that in agriculture.
In ascertaining the value product of recreational uses-which are largely
nonconsumptive-one faces the difficult problem of extramarket values.
There are cases, however, in which the economic argument suggests a
change in the present preference ranking of recreational uses. Generally,
this ranking is the lowest. Under some statutes, recreational uses are not
even recognized as "reasonable and beneficial."
In spite of the existence of a favorable economic argument for abolish-
ing the usual statutory ranking of industrial and agricultural uses and for
other changes in preference classifications, inferences with respect to pub-
lic policy would be premature without considering the criterion of flexibility
jointly with that of security. The economic implications of water reserva-
tions, likewise, cannot be fully appraised without considering the criterion
of flexibility. An interpretation of this criterion will be undertaken in a
later section (Section 4). Before this can be done, our interpretation of
security of water rights must be related to "protection of investment" in
water resources development.


3. SECURITY OF WATER RIGHTS AND PROTECTION OF INVESTMENT

The relations between security of water rights and investment in water
resources development are generally the main point of emphasis when the
economic implications of differences in individual water rights and whole


11. Significant exceptions occur, for example, in Texas.
12. We are using the word "average" because each of the two preference classes
covers water development by different users for different products in different time
intervals. In the present context, we refer, of course, to future "additional" water
development. A change in preference classification does not affect already vested
appropriative rights. Under the riparian doctrine, industrial and agricultural uses
are both "artificial" and, therefore, coequal.






ECONOMIC CRITERIA IN WATER RIGHTS


water-right systems are discussed. This emphasis is justified. Most eco-
nomic implications of security which were mentioned in the preceding sec-
tion are in this area. The objective of the present section is to state some
of these relations more explicitly and to consider them in the light of the
concept, "protection of investment."
In economic theory, "investment" and its corollary "disinvestment" re-
fer to value changes in total capital of individuals or whole social groups
as a result of differences between income and consumption. This is not
what is meant here. In the present context, "investment" refers to what
the economist would call the value of particular durable physical "assets."13
The value of durable physical assets depends on the flow of net income which
the assets are expected to "yield" over time. 14 Assets themselves, how-
ever, refer to the present, and the income flow which determines their value
is subject to a time discount and ah allowance for uncertainty. Thus, we are
concerned here with the protection against physical and tenure uncertain-
ties to which this income flow is subject. The degree of such protection
differs greatly for water rights with different security-as explained in the
preceding section.
At first glance, it might be expected that, other things being equal, a
greater or smaller security of water rights will result in an increase or
decrease of investment in water resources development. This inference
needs some scrutiny.
Frequently, a greater degree of security for some water rights neces-
sarily entails a smaller degree of security for other rights. For example,
dividing appropriative rights on a given surface stream into senior and
junior rights increases security against physical uncertainty for the former
but decreases it for the latter. If a certain type of use-such as municipal-
receives a higher preference ranking than another-such as agricultural-or
if the rights of the latter are restricted by water reservations in favor of the
former, security against tenure uncertainty is increased for water rights
held by the municipality but decreased for rights held by the agricultural
users. This situation does not make the above inference invalid in terms of
investment by individuals. But it should not be applied to aggregate invest-
ment in water resources development of a given surface stream, ground-
water basin, or region. From the standpoint of public water policy, such
aggregates of investment are important.
The statement was made in the preceding section that generally (that is,
without taking account of modification through prescription, preferences,

13. One may differentiate between three forms of assets: (1) physical assets
(natural resources, improvements, equipment, inventories), (2) money assets (se-
curities, loans, cash), and (3) personal assets (labor, skills, and "good will" of the
individuals or groups who hold assets).
14. The resale or "scrap" value of durable physical assets at the time they are
sold or scrapped is included in this flow.






LAW OF WATER ALLOCATION


reservations, and physical factors) appropriative rights give greater secu-
rity against tenure uncertainty than riparian and correlative rights. This
comparison refers to all water rights on a surface stream, in a ground-
water basin, or in a region. In this case, therefore, the inference with re-
spect to investment is valid for aggregates of investment. For this reason,
the conclusion that the appropriation doctrine favors investment in water
resources development-if compared with the riparian and correlative rights
doctrines-is justified. One should keep in mind, however, that only pro-
tection against tenure uncertainty, in the defined sense, is involved.
When one compares different water rights and water-right systems in
terms of implications for investment, one touches on aspects of the con-
cept "adequate compensation." This occurs, for example, if the degree
of protection against tenure uncertainty is affected by prescription, pref-
erences, and reservations. Prescription does not involve compensation
according to law. Preferences and reservations involve compensation
under some laws but not under others.15 Regardless of the legal aspects,
one may raise the question whether and under what conditions compensa-
tion might be considered in public policy as a problem of economics.
Let us assume that a reservation exists on the flow of a surface stream
and that a municipality holds the reservation and will not need the water
for 20 years. During this period, the water is available for temporary
appropriation by other users. Let us assume that the only alternative use
is agricultural. Let us assume further that such use involves considerable
expenditure for diversion and storage dams, main canals, a distribution
system, land leveling, and other durable improvements. A private user
will make these expenditures only if they seem warranted by the income
stream the durable assets are expected to yield. From the standpoint of
the private user, the duration of the income stream is uncertain because
of his water tenure. Under these conditions, the expenditure may not be
forthcoming, and the water may go unutilized for 20 years.


15. The constitutions of Idaho and Nebraska grant preferences in time of scarc-
ity of water, first to domestic uses, second to agriculture, but make exercise of the
right contingent on payment of compensation. The Colorado constitution grants
similar preferences without mention of compensation; but the Colorado Supreme
Court has held that, despite that provision, full compensation is required. Statutes
of Oregon and Utah give similar preferences in time of scarcity without mention of
compensation.
In Texas, reservation does not involve compensation, although there is a differ-
ence of opinion as to the validity of the statute granting blanket reservations to
municipalities. In California, a municipality holding a reservation must compen-
sate the temporary appropriator.
For these and other differences in state laws, see Hutchins, Wells A., Selected
Problems in the Law of Water Rights in the West (Washington, D.C.: 1942), espe-
cially pp. 337-358. (U. S. Department of Agriculture Miscellaneous Publication
No. 418.)






ECONOMIC CRITERIA IN WATER RIGHTS


In such a situation, a guarantee of compensation for nonrecovery (be-
* cause of termination of water tenure) of expenditures plus a sufficient
profit margin would offset the deterrent to a private user to develop the
available water on a temporary basis. Whether "protection of investment"
in this sense would be economically warranted from the standpoint of
public water policy is not self-evident but can be ascertained by benefit-
cost analysis.16
In such an analysis, some benefits are considered which the private
user must leave out of account. Such benefits may, for example, result
from flood control or ground-water recharge. Benefits yielded after 20
years are also considered. For example, dams and other facilities may
be usable by the municipality although it may not be legally required to
pay for them. Further, some costs of construction which the private user
must consider appear smaller in benefit-cost analysis-for example, labor
costs of construction in a period of unemployment under sticky wage rates.
The foregoing argument in favor of "protection of investment" in water
resources development is based on two necessary conditions: (1) that ex-
penditures for durable assets are in the public interest, although they may
not be economical for private water users, and (2) that the most eco-
nomical alternative for public policy to develop water resources is a guar-
antee just sufficient to induce private development. There is no implica-
tion in this argument that "protection of investment" per se is in the public
interest.


4. INTERPRETATION OF "FLEXIBILITY" OF WATER RIGHTS

In interpreting flexibility of water rights, one thinks first of all of "legal
flexibility." This is a corollary to "legal uncertainty," the two main cate-
gories of which were mentioned above (Section 2).
Legal uncertainty may be regarded as the price that must be paid for
obtaining legal flexibility. There has been considerable discussion within
the legal profession on whether or not the product-a law responsive to the
ne as of the community--stands in fair relation to its price. During the
twentieth century, the trend in legal thinking has been to answer this ques-
tion in the affirmative. To be sure, there are differences among prominent
legal thinkers with respect to the desirable degree of flexibility in particu-
lar areas of law-such as property rights; but all agree (including non-
American jurists) that flexibility is necessary and that the American de-
velopment of the Anglo-Saxon common law is better suited than other legal
systems for approaching the most desirable degree of flexibility through
trial and error and step by step. Within jurisprudence, this degree at a

16. Ciriacy-Wantrup, S. V., "Benefit-Cost Analysis and Public Resource De-
velopment," Journal of Farm Economics, vol. XXXVII, no. 4, November, 1955, pp.
676-689.


1






LAW OF WATER ALLOCATION


given time and place will remain the subject of perpetual discussion, reap-
praisal, shifting of emphasis, and ambivalent attitudes. Far from being a
weakness, such a condition would appear a normal or even necessary one
for an effective contribution by the law to "social engineering"-to use a
term popular with Roscoe Pound17 and other students of law.
Within economics, we are concerned not so much with legal flexibility
as with the needs themselves to which the law responds. In economics,
therefore, the interpretation of "flexibility of water rights" differs from
that of "flexibility of water law" as discussed in jurisprudence, and an in-
crease in flexibility of water rights is not necessarily incompatible with
an increase in their security-as stated in the beginning (Section 1). The
needs of particular interest in connection with flexibility of water rights
are created by economic change.
The impact of economic change upon water use may be divided concep-
tually into two parts-which in reality, and for water policy, are not inde-
pendent: (1) a change in aggregate development of water resources within
a region (country, state, watershed, ground-water basin), and (2) a change
in allocation of water resources between regions, uses (municipal, agricul-
tural, industrial, recreational), and users (individuals, firms, public di-
stricts, government agencies). The criterion "security of water rights" is
significant for the former change-as discussed in the preceding two sec-
tions. The criterion "flexibility of water rights," as interpreted here,
focuses on those aspects of water rights which facilitate or obstruct
changes over time in the allocation of water resources between regions,
uses, and users. Several such aspects must be considered.
There is first the "transferability" of water rights. Water rights, like
other property rights, can be transferred in various ways.
Voluntary transfer of water rights through buying and selling-with land
if they are "appurtenant" or without land if they are not-is not uncommon.
Appropriative rights are better suited for such transfer than riparian rights
because the former are clearly defined in quantity, priority, points of di-
version and other ways. Transfer of riparian and correlative rights gen-
erally requires also transfer of land.18 Furthermore, they are not clearly
defined quantitively and are insecure against physical and tenure uncertain-
ties (Section 2). With respect to transferability, therefore, the appropria-
doctrine favors flexibility of water rights in the course of economic change.
The market for water rights-and especially its "imperfections"-is an
interesting topic for the economist. This paper, however, is more concerned
with flexibility of water rights as a whole. Transfer of water rights through

17. Pound, Roscoe, The Spirit of the Common Law (Francestown, New Hamp-
shire: Marshall Jones Company, 1921).
18. Riparian rights may be waived by a grant to nonriparians. Such grant is not
effective against other riparians and is not really a transfer of the riparian right.
But from the economic standpoint, it is just as effective. It frequently happens
that riparian rights are bought up or condemned.






ECONOMIC CRITERIA IN WATER RIGHTS


the market mechanism is only one aspect. Involuntary transfer of water
rights is probably more important in number of transactions and quantity
of water involved than transfers through the market.
Involuntary transfer may, first of all, be accomplished through con-
demnation for public use. This process, by constitutional provision, in-
volves compensation. Appropriative rights are better suited for this proc-
ess than riparian and correlative rights for the same reasons as were
S mentioned in connection with voluntary transfer. Furthermore, it is usually
sufficient to condemn only a few appropriative rights with high priority.
Under the riparian doctrine, it is frequently necessary to condemn all ri-
parian rights. In this comparison, we assume, of course, that only one
system of rights applies to a water resource (Section 2).
Second, involuntary transfer can be accomplished through prescription.
This process of transfer does not involve compensation. As we know (Sec-
tion 2), prescription operates under all water-right systems; but there are
differences in its economic significance under various systems.19 Prescrip-
tion takes time-from 3 to 20 years (5 years in California), depending on the
statute of limitation-to ripen into a vested prescriptive right. Adverse and
open beneficial use, the condition for prescription, is more likely to persist
unobjected to for such a period against downstream riparian rights and cor-
relative rights than against appropriative rights. A prescriptive right can in
turn be lost through prescription by others. Prescription, therefore, is not
irreversible but a potentially always present and economically interesting
process of transfer.
Abandonment and forfeiture of water rights-operating only under ap-
propriation-may also be regarded as processes of transfer. Their present
over-all significance for flexibility of water rights is minor. However,
through defining conditions of forfeiture-for example, through legislative,
judicial, and executive defining and redefining of "beneficial" use-the eco-
nomic significance of this process: could be increased.
Voluntary and involuntary transfer of water rights is only one aspect of
flexibility. There is fairly general agreement that, aside from the aspect
of transferability, a water right system based on the riparian and correla-
tive rights doctrines if compared with a system based on appropriation,
contains elements of greater flexibility. Under the riparian doctrine, new


19. The differences suggested here do not involve the legal problem of whether
or not a prescriptive title "good against the world" can be established without the
necessity of valid statutory appropriation. For different conclusions on this point,
see: Kletzing, Russell R., "Prescriptive Water Rights in California: Is Application
a Prerequisite?" California Law Review, vol. 39, no. 3, September, 1951, pp. 369-
376. Trowbridge, Delger, "Prescriptive Water Rights in California: An Addendum,"
California Law Review, vol. 39, no. 4, December, 1951, pp. 525-527. Craig, Gavin
M., "Prescriptive Water Rights in California and the Necessity for a Valid Statu-
tory Appropriation," California Law Review, vol. 42, no. 2, May, 1954, pp. 219-242.


1






LAW OF WATER ALLOCATION


uses created by economic change compete on an equal legal basis with older
uses and obtain rights that are no less secure against physical uncertainty
than older rights. This is a corollary to the tenure uncertainty so charac-
teristic for riparian and correlative rights (Section 2). Under the appropri-
ation doctrine, on the other hand, new uses can obtain only inferior rights in
terms of security against physical uncertainty. As just noted, however, the
economic significance of such flexibility, inherent in riparian and correla-
tive rights, is reduced over time for a given region through prescription.
Preferences and reservations are important for flexibility because of
their obstructive influence. They tend to continue into the future the favor-
able treatment of certain uses or users on the basis of present economic
conditions. Preferences and reservations do not obstruct growth itself.
Quite the contrary, they are designed to facilitate growth. They facilitate,
however, only the growth of that use which is deemed to deserve preferen-
tial treatment on the basis of present economic conditions. They obstruct
the growth of other uses. Economic change may well require a change in
the ranking of uses. As already suggested (Section 2), preferential treat-
ment is unobjectionable for domestic and municipal uses. On the other hand,
extension of preferences to other uses-for example, in favor of agricul-
tural against industrial-or extension of reservations to all users of one
region against users of another-for example, in favor of counties and water-
sheds of "origin" against those of "destination"20 -obstructs changes over
time in the allocation of water resources.
The aspects of flexibility discussed so far relate to statutory water law.
It would be a serious mistake to overlook the great significance of the case
law for flexibility. As already stated (Section 1), concepts are used as cri-
teria "in" water law that imply an economic appraisal. These concepts are
rather plastic and give considerable scope to the judicial development of
water law through decisions in individual cases of controversy. Concepts
like "reasonable" and "beneficial" use, "waste," "surplus" of water, "max-
imum utilization" are interpreted and reinterpreted by the courts contin-
uously in the light of changing economic conditions. Over time, the result
has frequently been a change in the allocation of water resources between
uses and, through it, between users.
Besides taking economic change into account in deciding controversies,
the courts are directly concerned with the transfer of water rights through
eminent domain. Condemnation of water rights for public use is well es-
tablished in all states. Going much farther than that, the State of Washing-
ton permits any person to condemn a lower water use for a higher use.21
For this purpose any beneficial use is declared to be a public use. The
courts determine which use is the higher one.

20. California, State of, Water Code, 1953 (Sacramento: California Printing
Division), Section 10505, p. 195. Ibid., Section 11460, p. 205. See also: Ciriacy-
Wantrup, "Some Economic Issues in Water Rights," op. cit.
21. Rev. Code Wash., sec. 90.04.030.







ECONOMIC CRITERIA IN WATER RIGHTS


Under the American form of government, the contribution to flexibility
by the executive branch of government is probably smaller than that of the
legislative and the judiciary because of the constitutional issue of "delega-
tion of power." In some states, however, the executive agency charged
with the administration of appropriation statutes is given considerable
discretion in granting and conditioning appropriation permits. Such dis-
cretion has been upheld by the courts.22
This section has considered the economic meaning of flexibility of water
rights and the institutional possibilities through which flexibility may be-
come operative in reality. There remains the task of considering flexibil-
ity jointly with security as economic criteria from the standpoint of public
water policy.


5. WELFARE ECONOMICS AND WATER ALLOCATION

In an attempt to develop criteria for public policy, economists have de-
veloped a branch of normative economics called "welfare economics."
More recently, this branch has become known as the "new" welfare eco-
nomics to emphasize its development in England and the United States
since the 1930's. Its essential problems were recognized and its relevant
theorems developed in the 1890's by Pareto.23

22. Sections 1253 and 1254 of the- California Water Code provide that the De-
partment of Public Works shall allow appropriations under terms and conditions
which "in its judgment" will best serve the public interest in water conservation.
However, in acting upon applications, the Department shall be guided by the policy
that domestic use of water is highest and irrigation next highest. The California
Supreme Court, in East Bay Municipal IYtility Dist. v. State Department of Public
Works, 1 Calif. (2d) 476, 479-481, 35 Pac. (2d) 1027 (1934), upheld the action of
the state agency in inserting in a permit, pursuant to these statutory provisions,
the following condition: "The right to stpre and use water for power purposes un-
der this permit shall not interfere with future appropriations of said water for agri-
cultural or municipal purposes."
In a more recent decision, in Temescal Water Co. v. State Department of Pub-
lic Works, 44 Calif. (2d) 90, 99-101, 289 Pac. (2d) 1 (1955), the court held that the
cumulative effect of statutory changes had been to create a type of proceeding
greatly different from that con idered in some earlier decisions. In carrying out
its present duty, held the court, the Department of Public Works exercises a broad
discretion in determining whether the issuance of a permit will best serve the pub-
lic interest. That determination requires an administrative adjudication. If issu-
ance of the permit is protested as the statute authorizes, the administrative deci-
sion may be made only after a hearing of the protest. The decision is subject to
judicial review by way of writ of mandate.
These two decisions were called to 1he author's attention by Wells A. Hutchins.
23. Pareto, Vilfredo, Cours d'Econ mique Politique (Lausanne: F. Rouge,
Libraire-Editeur, 1897).


I







LAW OF WATER ALLOCATION


In formulating policy criteria, welfare economics takes explicit account
of differences in individual preferences and incomes and of the resulting
problems in aggregating individual utilities. It is an economic axiom that
the marginal utility of individual income decreases with increasing income.
There is no agreement among economists on whether and in what sense-
ordinally or cardinally--individual utilities can be compared; but welfare
criteria that avoid interpersonal comparisons are generally preferred.
Classical and neoclassical economists were well aware of these prob-
lems.24 They, however, focused on an increase of real aggregate national
income as the main criterion of economic welfare.25 Pareto's views were
not in conflict with this emphasis because he believed-supported by his-
torical experience as he saw it-that an increase of national income and
greater equality of income distribution tended to be associated. In this
case, an increase of national income means also an increase of economic
welfare according to Pareto's criterion at least under some generally
accepted assumptions.
The positive correlation between changes of national income and of
equality of income distribution-sometimes called "Pareto's law"-was
challenged by Pigou26 and others; but Pareto's welfare criterion is in-
dependent of his "law." This does not imply that the correlation noted
by Pareto does not exist nor that Pareto's criterion is of greater sig-
nificance for economic theory than his "law." Quite the contrary, one may
wonder whether the great intellectual effort of the last 20 years which has
been invested in developing Pareto's criterion might not have yielded
greater dividends, in terms of knowledge as well as welfare, if it had
been employed for further investigation of Pareto's law and of the prob-
lem associated with the increase of national income.
The Pareto criterion says that a change that makes at least one indi-
vidual better off and leaves no individual worse off represents an increase
of welfare. This criterion is usually interpreted to mean that welfare is
increased by a change rendering it "possible" to make at least one indi-
vidual better off and leave no individual worse off by compensating the
losers. Most of the discussion in the new welfare economics deals with
this compensation principle.
The Pareto criterion "without" compensation is so restrictive that it
has little relevance for an appraisal of public policies-even if it could be

24. The first edition of Alfred Marshall's Principles of Economics appeared in
1890, seven years before publication of Pareto's main work in French. Marshall
mentions Pareto only in passing and in a different connection.
25. When comparing national income at different points of time and for differ-
ent countries, per capital figures are used. In appraising alternative policies, it is
more useful to focus on aggregate income.
26. Pigou, A. C., The Economics of Welfare (London: Macmillan and Company,
Limited, 1938).


~






ECONOMIC CRITERIA IN WATER RIGHTS


practically applied. There are scarcely any policies which make nobody
worse off. Furthermore, if there were such policies, the criterion would
be ineffective for choosing between more than one alternative to the status
quo. The Pareto criterion "with" compensation is not so restrictive, but
its application is even less practical.
The Pareto "with" criterion is conceptually not identical with the cri-
terion "increase of national income." But the latter criterion may be re-
garded as a practical first approximation to the former, provided that the
policy under consideration does not appreciably increase inequality of in-
come distribution; and provided further that there are other policies in
operation which work independently and continually in the direction of
greater equality of income distribution. Such policies are, for example,
progression in income and property taxes, high inheritance taxes, and
"social welfare" legislation in the narrower sense (relating to old age,
invalidity, unemployment, minimum wages, and public health, education,
and so on). In some practically important cases these two conditions can
be regarded as fulfilled when considering resource policies in modern
western societies.
Accepting an increase of national income as an economic criterion for
public water policy does not imply that application of this criterion faces
no theoretical and practical difficulties or that it is the most useful cri-
terion under conditions where economic change and uncertainty are the
central problems. We shall return to these problems in the concluding
section (Section 6).
The contribution of welfare economics has been a clarification of the
theoretical meaning (or absence of it) of a social welfare function and so-
cial indifference curves and of the difficulties (or impossibility) of apply-
ing the Pareto criterion in actuality.27 The disservice of welfare eco-
nomics has been that its terminology is used by economists and others
without pointing out these theoretical and practical difficulties. The false
impression is created that a simple criterion is available that can be used
for legislation, court decisions, administrative regulation, and social
planning in general.
In the field of water allocation policy, such use of welfare economics can
best be shown by an example.
In a recent paper, optimum water allocation in social planning is analyzed
Sby superimposing smoothly convex social satisfaction indifference curves
on a single production possibilities curve equidistant from the point of
origin.28 In this analysis, determining the point of maximum social satis-

27. For the last (but probably not final) word in this clarification, see: Samuel-
Sson, Paul A., "Social Indifference Curves," Quarterly Journal of Economics, vol.
LXX, February, 1956, pp. 1-22. This article cites the significant previous literature.
28. Heady, Earl 0., and John F. Timimons, "Economic Framework for Planning
and Legislating Efficient Use of Water Resources," presented at the Seminar on


I






LAW OF WATER ALLOCATION


faction in water allocation between two uses becomes a matter of simple
geometry.
No information is given as to how the social satisfaction indifference
curves can be determined theoretically and computed in actuality. A high-
er indifference curve does not become "Pareto-better" by word magic.
The suggestion that such curves could be used for water allocation in leg-
islating and planning must be regarded as not warranted by the state of
welfare economics.
For some time, cost and revenue indifference systems have been in use
to analyze decision making in firm economics.29 But applying a single
equidistant possibilities curve to policy decisions raises questions no less
serious than the use of social satisfaction indifference curves.
The ancestry of a single production possibilities curve, the apparent
simplicity of which has made it rather popular recently, can be traced to
two basic assumptions of programming.30 These assumptions are, first,
existence of limitational factors-especially capital-and, second, inde-
pendence of decisions regarding the intensity of each process and deci-
sions regarding the combination of processes. No information is given as
to what limitational factors are assumed. From the standpoint of policy,
capital and other factors are limitational only under narrowly defined
short-run static assumptions. Under such assumptions, water allocation
through legislation, court decisions, and administrative regulation has
little meaning.
Under long-run static and under dynamic assumptions, policy decisions
regarding water allocation are not independent of policy decisions regard-
ing water development (Section 4). A single production possibilities curve
"assumes away" the essential problem of the meaning and the determina-
tion of marginal costs of water development. Water allocation policy deals
with a whole system of cost indifference curves. Which one is relevant can
be ascertained only after comparing them with a system of "revenue" in-
difference curves. The optimum point of water allocation then becomes a
curve of "optimum direction"-using the terminology of vector analysis.31
This curve is not monotonic, and under assumptions approaching reality,
it is a space curve.

Iowa's Water Resources, sponsored by the Agricultural Law Center, College of
Law, State University of Iowa, and the Division of Agriculture, Iowa State College,
Ames, Iowa, March 26, 1956, 22p. Processed.
29. Ciriacy-Wantrup, S. V., "Economics of Joint Costs in Agriculture," Journal
of Farm Economics, vol. XXIII, no. 4, December, 1941.
30. The reader with no technical training in economics may want to consult an
easily understandable explanation of the assumptions and techniques of program-
ming, for example: Boles, James N., "Linear Programming and Farm Management
Analysis," Journal of Farm Economics, vol. XXXVII, no. 1, February, 1955.
31. Ciriacy-Wantrup, S. V., "Economics of Joint Costs in Agriculture," op. cit.,
p. 794.







ECONOMIC CRITERIA IN WATER RIGHTS


The equidistant feature of the single possibilities curve implies that
changes in the water use vector have no influence upon production possi-
bilities. By this implication, one #assumes away" another essential prob-
lem of water allocation. This problem is created by great differences in
water quality requirements between water uses. This problem presents
itself in economic terms through important relations between quality, quan-
tity, and costs. Some of these relations were indicated above (Section 2).
One must conclude, therefore, that a single equidistant production pos-
sibilities curve has no meaning for water allocation policy-whatever its
use may be in firm economics.
The foregoing example is of some interest because it combines the ap-
proaches and techniques of the two most important branches of normative
economics-welfare economics and firm economics-and attempts to derive
from such a combination criteria for public water policy. The questions
raised so far with respect to this attempt are overshadowed in their im-
plications for water policy by another: Is it conceptually useful to make
the maximization principle the basis of economic criteria for pursuing
the public interest?


6. ECONOMIC CRITERIA AND THE PUBLIC INTEREST

The maximization principle is applied in normative economics, first, as
efficiency criterion for limited operations under restrictive assumptions
and, second, as the assumed over-all objective of individuals and groups.
As efficiency criterion, the maximization principle is used, for example,
in finding the optimum output under given cost and revenue functions and
also in determining minimum costs for each output under given production
functions and given price schedules of productive factors, that is, in deter-
mining a cost function. For these purposes the maximization principle is
necessary. There can be no disagreement on the usefulness of such opera-
tions. One may call this application of the maximization principle "efficiency
economics" or, more appropriately in some cases, "efficiency engineering."
If applied as the assumed over-all objective of individuals and group, on
the other hand, the maximization principle is a construct, a scientific fic-
tion.32 It is useful in economics, especially in modern western culture, if
employed in connection with another construct-the "firm." Frequent ref-
erences in recent economic literature to maxima of individual and social
satisfaction indicate that the maximization principle is more and more ap-
plied as a fiction.
A fiction is permissible in science if its character is clearly understood.

32. Next to mathematics and law, economics is the discipline in which scienti-
fic fictions are most common. But the natural sciences, especially modern physics,
frequently employ fictions.






LAW OF WATER ALLOCATION


A fiction is a deliberate, conscious deviation from reality. A fiction, how-
ever, is not an hypothesis or theory. By itself, a fiction is not intended to
be validated by testing with empirical evidence. But a scientific fiction
should be useful as a stimulus for or as a part of hypotheses and theories
which can be so tested. That means the test of a scientific fiction is its
conceptual usefulness, its expediency in understanding, explaining, and
predicting reality. A fiction becomes mere dogma and, therefore, unscien-
tific if its two characteristics-consciousness of its fictional nature and
conceptual usefullness-are obliterated. There are many examples in the
history of science of fictions changing into dogma.
One may wonder whether or not the maximization principle has some-
times become dogma in economics. There is increasing emphasis on tech-
niques which facilitate greater numerical accuracy in the determination of
optima for the firm. These same techniques are then used for maximizing
social satisfaction of whole groups with no conceptual gain and at the ex-
pense of "assuming away" essential economic relations; an example of such
use was just given (Section 5).
It was suggested above that, under certain conditions, an increase of na-
tional income may be accepted as a criterion for resource policies. The
Pareto criterion, likewise, is suited only for ascertaining whether or not
an increase of social welfare has occurred but not for determining a max-
imum.
The criterion "increase of national income" can be employed effectively
in appraising water policies of more limited scope, for example, in ap-
praising an individual water development project or in deciding a particular
case of controversy in water allocation. This is the approach of benefit-
cost analysis referred to earlier (Sections 2 and 3). These limitations on
the applicability of this criterion are imposed by a number of theoretical
and practical difficulties some of which can be overcome only by restric-
tive assumptions.
The quantities of goods and services making up the national income must
be evaluated (weighted) in order to be aggregated. The weights used-mar-
ket prices and unit values derived indirectly from prices and in other ways-
are affected by income distribution and by the host of institutions which in-
fluence this distribution. Both value weights and quantities are affected by
market form. Policies to be appraised may change income distribution and
market form. Such an appraisal deals with the future. Over time, individual
preferences and technology-both affecting value weights and quantities of
national income-change, and these changes are uncertain. Again, policies
to be appraised affect these changes. Besides such "structural" changes,
there are changes connected with economic fluctuations of various ampli-
tude and duration. These, likewise, are related to the policies to be ap-
praised. All these problems are of interest for benefit-cost analysis, input-
output studies of the Leontieff type, and other systematic attempts at a
quantitative economic appraisal of policy.







ECONOMIC CRITERIA IN WATER RIGHTS


Practical approximations to a solution of some of these difficulties are
possible but only under restrictive assumptions with respect to institutions,
preferences, technology, and time periods. Frequently, these assumptions
are not made explicit when public water development projects are appraised
through benefit-cost analysis and when judicial decisions and arguments be-
fore the courts involve "equity" of water allocation and the interpretation of
"reasonable" and "beneficial" water use.
For policies of broader scope, the restrictive assumptions needed for
benefit-cost analysis become too burdensome. In appraising such policies,
it is useful to employ as criteria their effects upon significant conditions
which facilitate or impede an increase of national income rather than focus
on such an increase itself. This approach to policy criteria relies heavily
on economic theory but less on maximization. This approach is greatly
interested in economic history and in relating one time period to another
but not necessarily through increasing the number of variables and equa-
tions in mathematical models. This approach is especially suited for nat-
ural resources policies and has been discussed in detail elsewhere.33
The emphasis of this approach is on minimum standards in resource
use rather than on the optimum use; on establishing base levels rather
than on locating peaks; on avoiding dead-end streets and on keeping direc-
tion rather than on computing the shortest distance; on mobility and adapt-
ability of productive factors rather than on their optimum combination; on
reducing institutional obstacles to water development rather than on max-
imum development; and on provisions in water law that facilitate changes
over time in water allocation rather than on an optimum water allocation
at particular times and places.
This approach does not pretend to establish criteria for maximizing
social satisfaction. But it offers effective direction signals for pursuing
the public interest turn by turn. I
It becomes apparent now in what sense security and flexibility of water
rights can be regarded as economic criteria and why so much attention was
given to these concepts previously (Sections 2-4). Both relate to significant
conditions which facilitate or impede an increase of national income in a
world of persistent but uncertain change. We saw that the criterion "secu-
rity" is as significant for water development as the criterion "flexibility"
is for water allocation. We also saw that the logical polarity of these cri-
teria does not necessarily imply that they are "competitive" if applied in
an economically meaningful way. This is a corollary of the economic in-
terdependence of policies concerned with water development and those con-
cerned with water allocation (Section 5).
What are the conclusions for the relations between economics and law-
taken as two important social science disciplines? Economics cannot de-

33. Ciriacy-Wantrup, S. V., Resource Conservation: Economics and Policies
(Berkeley: University of California Press, 1952), 395p. See especially Chapter 18.


1






LAW OF WATER ALLOCATION


fine social optima which the law-as "social engineering"-should aim to
realize. What economics can do, however, is to explain why and how far
certain conditions, which are decisively influenced by the law, facilitate
or impede an increase of national income. Economics can point out the
essential features of conflict situations and the probable consequences of
changes in statutory provisions, judicial decisions, and administrative
regulations. Sometimes, these consequences can be shown in quantitative
terms under restrictive assumptions. More often, the consequences can
be indicated merely in terms of direction and in terms of relative mag-
nitudes and rates of change.
Economics need not be passive in fulfilling this function. Frequently
a conflict situation can be identified in economic terms before it has
arisen in law as a controversy. After it has arisen as a controversy, the
essential economic features may not be clear to the contestants them-
selves.
A first, but necessary, step toward implementing such a relation be-
tween economics and law is mutual understanding with respect to the in-
terpretation and application of key concepts used as economic criteria.
In the area of water law, such concepts are security and flexibility of
water rights.
To such an understanding, both normative and positive economics can
make a contribution. If a value judgment is permitted, one may add that
the contribution by positive economics has been greater and that this will
probably hold also in the future. The law, on the other hand, is essentially
a normative discipline. For this reason, doubt was already expressed
(Section 1) that "integration" of law and economics is possible or desir-
able. But in spite of-or possibly because of-differences in basic orien-
tation, positive economics and law have many complementary relations.
To explore and to strengthen these relations will benefit both social
science disciplines.




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