Title: Economic Factors in the Study of Water Use
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Title: Economic Factors in the Study of Water Use
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Abstract: Richard Hamann's Collection - Economic Factors in the Study of Water Use
General Note: Box 12, Folder 7 ( The Law of Water Allocation In The Eastern United States - 1956 ), Item 21
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ECONOMIC FACTORS IN THE STUDY OF
WATER USE
by Nathaniel Wollman*




INTRODUCTION

The Southwest's aridity has provided the nation with a delightful scenic
and climatic interlude between Dallas and Los Angeles but, in the minds
of many inhabitants, has thwarted the region's aspirations to bigger and
better things. It now appears that the shortage of water which has dom-
inated life in the region for some time is a harbinger of things to come
elsewhere in the country. The growth of population and changing technol-
ogy in agriculture and industry has suddenly awakened the nation to the
fact that water is a scarce and valuable resource. But what is the basis
of a mildly unsettling revelation in the more humid parts of the country
is a matter of life or death in the Southwest.
As realization of the water scarcity's seriousness has grown, private
and public interests have stimulated a variety of inquiries covering cloud-
seeding, desalting of sea water, anti-pollution, increased use of desert
plants, anti-evaporants, large-scale public works, and a reexamination
of the legal foundations of property rights in water. Very little has been
done, except in connection with securing Congressional approval of public
works (where efforts have been extensive) in the economics of water use:
examination of the uses to which water is put, construction of a yardstick
whereby it is possible to decide whether or not the prevailing pattern of
uses maximizes social welfare, and adoption of units of measurement
whereby the deviation of prevailing from optimum usage can be quanti-
tatively expressed.
The present pattern of water use in New Mexico can be said to depart
from aboriginal usage by no more than ten percent. No other resource of
the state shows the same steadfast allegiance to the ways of antiquity.
Early Indian settlers used the available water supply exclusively for do-
mestic use and irrigation; today 90% of the water beneficially consumed
in the state is used in the same way. But within the last two decades the
state's economy has turned sharply away from the past. Little country
towns are now the centers of uranium processing, oil and gas explora-
tions, and rocket shoots. Albuquerque's airport ranks among the busiest
ten in the country. The Laguna tribal council not long ago turned down a
proposal made by an enterprising white that he build a private airport on
the reservation and teach all the men to fly. Since the Laguna Indians had
several million dollars in cash and negotiable securities, the financial
Aspects of this transaction were perfectly sound.

Professor of Economics, University of New Mexico.


I






LAW OF WATER ALLOCATION


The growth and changing character of the state's economy have created
a host of problems large migrant populations, rapid city growth and lag-
ging facilities, urban and military encroachment on farming and ranching
lands but none seems so intractable as the ever-narrowing gap between
the water supply and the inexorable growth in demand. Competition for
the limited waters of the state has invested each user with the despera-
tion of a fight for survival. The enemy is not always the same, however;
opposing forces group and regroup according to the nature of the challenge.
Cotton growers below Elephant Butte Dam oppose the introduction of
sedimentation controls on the Rio Puerco, a tributary upstream, even
though Rio Puerco water is now mostly mud, because of a fear that such
controls will reduce the inflow into Elephant Butte Reservoir. When Rio
Puerco water reaches the aggraded bed of the Rio Grande the mud is
dropped. The swamps formed below the confluence of the two streams
have inundated several villages and, by spreading the water thinly over
an extensive area, have been the cause of excessive wastage through
evaporation and transpiration. At the demand of the cotton growers the
swamps were drained a couple of years ago, only to raise a cry from
hunters and nature lovers at the destruction of wild-life habitat.
At present the water supply of Albuquerque and other municipalities
along the Rio Grande comes from wells driven into the valley alluvial
beds. The increase in pumping has resulted in a diminished surface flow
of the river and a reduction in the supply of water available to those in
possession of surface water rights. Those who pump the ground water
suffer no limitation on withdrawals. The conflict between the two groups
of users is slowly mounting to a showdown and may be affected by the
outcome of a suit of New Mexico by Texas now before the courts regard-
ing water deliveries under the Rio Grande compact.
Proposals to increase the industrial use of water are fought by farm-
ers, hunters, and fishermen, who fear not only depletion of supplies but
the hazards to vegetable and animal life created by pollution. Albuquerque
and other municipalities are in danger every spring of floods, yet down-
stream users oppose any structures on the main stem of the river that may
detain the flow of water, increase losses of evaporation, and possibly re-
sult in a permanent reduction of stream flow.
The suspicion with which any change in the use of water is viewed in
the Southwest is illustrated by the opposition of Texas to a plan whereby
water would be diverted from the San Juan basin into the Rio Grande
basin. Although San Juan water drains into the Gulf of Lower California
and nowhere touches Texas territory, and although the added supply in
the Rio Grande would make it possible for more water to flow downstream
to Texas, the Lone Star State's congressional delegation voiced intransi-
gent opposition to the plan until assurance was given that no structure
would be built on the Rio Grande itself. As a result of this concession to
Texas, a sizable loss of hydroelectric power potential will be suffered by
New Mexico.






ECONOMIC FACTORS IN WATER USE


The northwest corner of the state characterized by its Navaho popu-
lation and the frenetic geological antics of oil, gas, and uranium pros-
pectors has been engaged in a prolonged feud with the Rio Grande por-
tion of the state over the amount of water to be brought across the
Continental Divide. The northwest corner claims that a potentially bright
future will be cut short by any undue demand upon its water supply, even
though most of it is presently unused. The Rio Grande people point out
that the major urban area of the region and the source of much of the
state's present prosperity hinges on the continued ability of the valley to
meet the demands for water imposed by Los Alamos, Sandia Base, White
Sands, Holloman Air Force Base, and related adjacent communities.
Since the arguments of both sides have merit, it is easy to see why a
solution that is more than a momentary political compromise eludes seri-
ous students of the problem. When water rights of the Navaho and the
Pueblo Indians are incorporated as ian additional variable, the proper al-
location of water becomes not only an exercise in mathematics but a socio-
logical problem that has frustrated ithe Indians, the Bureau of Indian Af-
fairs, and a host of self-appointed protectors of Indian rights.
New Mexico is faced with a probable growth of total population at a rate
in excess of the national average and with a growth of its city population
that is likely to be even more rapid. Much of this growth has been stim-
ulated by the expansion of military and AEC installations. At the same
time, with the exception of the San Juan basin, most surface water in the
state is fully appropriated;* over-appropriated, in fact, since run-off in
recent years has been far below the level that prevailed when existing
water rights were first established. The key to the state's long run eco-
nomic health is water. Of labor there is no foreseeable shortage, New
Mexico birth rates being what they are. It faces no shortage of space,
fuel, and energy. It is only when the question of water is raised that the
outlook is pessimistic; and this perspective is one that New Mexico
shares with her neighbors.
In the spring of 1955 the fifth international conference on arid lands,
(the first in the United States) was held on the campus of the University
of New Mexico, under sponsorship of the American Association for the
Advancement of Science, and then moved 65 miles to the New Mexico
Institute of Mining and Technology. Dr. Edward Ackerman, of Resources
for the Future, attended the conference and had the opportunity of meet-
ing a number of people in New Mexico who were interested in pursuing
the questions: (1) what is the "value" of water in various uses? (2) how
should water be used if it is to make its maximum contribution to the
region's economy? With the encouragement of Dr. Ackerman and Irving
K. Fox, of Resources for the Future, a research project directed toward


About 80,000 acre-feet are available on the Canadian River; some water is
available on the Gila, but the amount has not been established.






LAW OF WATER ALLOCATION


these questions has been formulated. The study as contemplated could
take place with equal justification in Arizona or Utah. Selection of New
Mexico was partly accidental, partly a reflection of the interest gener-
ated both inside and outside the state in the multifarious forms of com-
petition for water.


THE THEORETICAL BACKGROUND

In a perfectly competitive economy the problem of optimum water use
is presumably settled by the market: water would flow to those uses in
which it had the highest values.* Concomitant with such flow would be re-
sponsive changes in price and income payments. When all adjustments had
been completed, the allocation of water among alternative uses would be
such that no shift in use would raise the value of the economy's net prod-
uct or income. Further implied is the proposition that income to each
factor of production would reflect its marginal use, that there would be no
unemployed factors, and that the economy would have an ascertainable
"time preference rate" or comparative valuation of present in relation
to future net satisfactions.
If the supply of all factor services involved "pain" (or "disutility") that
had to be paid for, if the payments were just enough to offset the pain, and
if inter-personal comparisons of utility or disutility were possible, one
might possibly develop a rationalization whereby the results of the market.
processes not only maximized the market value of goods and services
produced but also maximized aggregate social satisfactions. As it is,
variations in market controls over labor, capital, raw materials and en-
terprise each of these categories itself being divisible into many
varieties and each variety subject to its own rules of market behavior -
make it impossible to conclude that income distribution in a free market
will automatically maximize aggregate satisfaction. One can go one step
further: given the adventitious character of income distribution, relative
prices among goods and hence the satisfaction derivable from a dol-
lar's worth of expenditure will not reflect underlying social wants ex-
cept by accident. For this reason a change in gross national product
measured by market prices need not be directly correlated with a change
in aggregate social satisfaction. An opposite correlation under certain
conditions is conceivable assuming, of course, that a non-monetary
measure of the change in aggregate social satisfaction is available.
In spite of the imperfections of market prices as a guide for desirable

For explanation of this and other economic terms, see the Glossary at the
end of this paper.
t The price level is assumed to remain unchanged, at least insofar as change
would be the result of general inflation or deflation.






ECONOMIC FACTORS IN WATER USE


social activity, the market price yardstick is likely to be retained for some
time to come by social scientists. For one thing, identification of, as well
as agreement on, non-monetary units of measurement has yet to be attained.
For another, those whose arguments rest on monetary valuations seem to
have an edge over those who must use other yardsticks of welfare. Finally,
in a system such as ours, where mass production characterizes large seg-
ments of the economy, it is conceivable that a change in income distribu-
tion brought about by eliminating economic rents,* would not result in
much alteration of the price structure for the existing assortment of goods
nor in a sharp change in the assortment of goods and services produced.
Having thus expressed a faith in the usefulness of market prices as a
measure of relative contributions to welfare, it does not follow that all
other assumptions of a perfectly competitive system need be retained. In
fact, the main problems in connection with development and use of water
resources arise out of discrepancies between the competitive model and
the real world.
Departures from the norms of a perfectly competitive market, with
special reference to the development and use of water resources, can be
classified under the following headings:
(a) unemployment or underemployment of one or more resources as
a result of cyclical fluctuations in the level of economic activity;
(b) non-cyclical underemployment of resources resulting from im-
mobility, ignorance, underdevelopment, inefficient combinations
of resources, and so forth;
(c) legal barriers to the free transferability of water from one use to
another;
(d) impurity of competition monopoly, monopsony, oligopoly,
oligopsony, etc.;
(e) inequality between private and social costs; inequality between
private and social benefits.
Any of the foregoing circumstances, separately or in combination can
mean that within a region there is a less-than-optimum utilization of its
resources, measuring deviation from the optimum as the difference be-
tween actual regional net social product and maximum potential regional
net social product. For purposes of this paper, a distinction will be made
between net social product and net product by confining the latter to the
sum of items that can be given a money value, whereas the former in-
cludes non-monetary items as well. It will be assumed that the public
welfare is advanced when the economy moves from a lower net product
to a higher one.
From the point of view of regional, in contrast with national, welfare,
another factor must also be considered: the inter-regional flow of in-
come payments. It is possible that maximum regional net product is

To some extent this is already done by personal and corporate income taxes.






LAW OF WATER ALLOCATION


associated with relatively high income outflows, whereas another produc-
tion pattern yielding a lower regional net product is associated with such
low income outflows that net income to the region is greater in the latter
case than in the former. Under these circumstances there is a conflict
between policies designed to maximize national welfare and policies de-
signed to maximize regional welfare. The conflict would disappear if we
could assume a highly mobile population, but in many instances this as-
sumption would be contrary to reality.


A REGIONAL STUDY

An economic study of regional, or, for that matter, national water pol-
icy requires several measurements: the value of water in different uses;
gross state product; net state product; and income payments under dif-
ferent assumed patterns of water use. The smaller the area the easier it
is to observe a change in gross product with a change in water use; at the
same time the range in probable error of gross product probably widens.
For goods and services sold in a competitive market, variation in value
according to use presumably is not a significant question. Value is the
same for all use at the margin of utilization, an outcome of shifting the
resource among all uses until it no longer pays to increase one use at the
expense of another. Where this shifting process is frozen by law, tech-
nology, market control, or custom, the equalizing process fails to take
place, and the possibility of variations in the marginal value of water
among different uses becomes a purposeful object of inquiry. In pursuit
of this inquiry, the investigator is confronted by a wide variety of ques-
tions. For example:
1. What change would occur in the value of crops if the supply of water
for a given region were increased by one acre-foot per year? What
would be the effect on crop production and the region's economy if
water supplies were reduced?
2. What is the minimum flow in second/feet that will maintain a given
density of fish population? What would be the effect on fish popula-
tion of increasing the flow by designated amounts? How would this
help the recreation industry?
3. What are water needs for the maintenance of ground cover in desig-
nated water sheds? What economic advantages would accrue from
consumption of additional supplies of water for this purpose?
4. What potential industrial and municipal water needs can be assigned
to the region on the basis of expected industrial and population growth?
What would be the probable impact on the region's economy if real-
ization of these developments were prevented by rigidity in the allo-
cation of water ? What would be the effects of substantial increases
in water supplies?






ECONOMIC FACTORS IN WATER USE


Answers to these questions would reveal average values of water for
various uses as well as provide a rough measure of the rate at which the
marginal value of water diminished in various uses. The significant
marginal values for public welfare are not "marginal revenue products,"
but "market values of the marginal product." Whether or not the latter
diverge from the former depends on the degree of monopoly power pos-
sessed by the seller of the product and the manner in which the monopoly
power is exercised by way of price policy. It is not likely, however, that
the degree of divergence can be established by anyone outside the indus-
try.
From the foregoing, it can be seen that the core of the problem goes be-
yond measurement of water values. Ultimately we want net product asso-
ciated with various patterns of water use.
Economic models can be constructed, each constituting a different pat-
tern of water consumption. For example, one pattern of water use, involv-
ing a total of 600,000 acre/feet of water might be as follows:


acre-feet
irrigation ................................ 490,000
depletions by soil conservation structures .......... 20,000
minimum supplies reserved for fish and wild-life
habitat ................................ 30,000
municipal use, industrial ...................... 20,000
municipal use, residential .................. .. 40,000
Total ....... 600,000

Suppose this pattern of water use actually prevails. It is possible to es-
timate the value of gross product, net product and income payments, as-
suming, of course, that data on the type of crops, the nature of industrial
processes, and the total employed labor force and their industrial distri-
bution are available. Other patterns of water use that are potentially sound
might then be considered. The following, assuming that industry location
studies indicate its possibility, reflects more industry and less irrigation:


acre-feet
irrigation ................................ 350,000
depletion by soil conservation structures ........... 40,000
fish and wild-life habitat ...................... 50,000
municipal use, industrial ................ ..... 70,000
municipal use, residential ................ .... 90,000

After calculating estimated gross and net product for this pattern of use,
the two could be compared in other terms: probable income distribution,






LAW OF WATER ALLOCATION


comparative stability of earnings, level of employment per unit of water
consumed, and per capital income payments to individuals.
In constructing the potential variants of an economy, the present level
of technology and knowledge of natural resources impose reasonably well-
defined limits on the imagination of the model builder. It is less clear
whether the status quo in social, economic, and political affairs should be
accepted as limiting the variety of models that can be constructed or as
imposing a temporary condition to be overridden in the search for maxi-
mum product: the division of water by interstate compact, Indian water
rights, riparian rights or rights acquired by appropriation, specific statu-
tory limitations on the acquisition of rights for certain uses, and so on.
Also, what degree of population mobility can be assumed, geographic and
occupational? How will growing urbanization affect not only urban de-
mands for water but non-urban as well, e.g., recreational uses?


SOME PROBLEMS OF METHOD

In making estimates of product and income payments the analysis would
follow the guides indicated by a market price system. Agricultural econ-
omists would estimate agricultural output and economic geologists would
estimate mineral production based on projected demand, costs, and
availability of water. With data on potential agricultural and mineral raw
materials in hand, supplemented by projections of population, markets,
and exogenous factors such as federal government activity, it would be
possible to estimate potential industrialization, urbanization, municipal
and industrial water uses, and the associated gross and net products.
Recreational values of fish, wildlife, and forests would be measured not
by what anglers and campers would pay, but what their demands repre-
sent in terms of net product. An imbalance or lack of parallelism is in-
troduced in the data to the extent that publicly supplied recreational re-
sources e.g., game fish are made available largely on a cost basis,
whereas privately supplied goods and services are available on a cost-
plus-profit basis. The effect of this disparity is monetary undervaluation
of government-supplied relative to privately-supplied goods and services.
We can make some adjustment by adding a profit and tax margin to
government-incurred costs and taking account of capital depletion, but the
likelihood is that values would still be disparate, since we have no way of
estimating what the free market price for government-supplied services
would be in the absence of information regarding elasticities of demand
and supply of such services under free market conditions.
Even if free market prices were available as a standard of comparison,
our problem would not be completely solved. It might be the judgment of






ECONOMIC FACTORS IN WATER USE


society that free market pricing of certain government services e.g.,
fishing and camping facilities is an inadequate standard of the contri-
butions to welfare made by such services. It is probably for this very
reason that the service is supplied to consumers on a tax-financed rather
than market-price financed basis. We measure the cost to the taxpayer
by the amount of tax he must pay, but we have no correspondingly clear-
cut way of measuring the value to society except by what the government
has spent. Obviously these measurements provide an insufficient guide to
action, since by this criterion any expenditure is worth the cost to the
taxpayer no more, no less.
One solution to the problem created by having to reconcile market with
non-market decisions is to place all decision-making in the lap of the
market. So far as water is concerned, this would mean allowing the market
price of water to find its own level or levels, based on the principle either
of clearing the market or of maximizing net income to the water seller, or
both, if discriminatory prices can be charged. Government financing of
water resource projects would be eliminated in favor of private financing,
and the level of investment in water resource projects would be deter-
mined by the profitability of such investment relative to competing demands
for funds.
It should be noted that this solution has some strong arguments in its
favor, most powerful of which may be its simplicity. Yet the implication
of such procedure is not always made clear by its proponents: to the ex-
tent that a free-market system is followed, incomes will be redistributed
in accordance with the relative scarcities of resources. Those who hold
title to water would gain a windfall analogous to those who profit by the rise
in urban land values. Furthermore, since investment in water-using projects
will also be settled by the market, those who supply the funds for such proj-
ects are likely to earn a higher rate of return on a smaller aggregate in-
vestment than is now the case. The net result of adopting a free market
for water assuming full employment within the economy would be to
transfer income from water users, customers of water users, and other
factors of production to owners of water rights and capital funds.* It is
quite likely that these changes would also increase the inequality of income
distribution unless counteracted by the fiscal system. Withdrawal by gov-
ernment from one activity supplier of water would require an increase
in another equalizer of income unless widening the gap between the
rich and the poor meets no opposition.
It might be that by substituting income-equalizing for resource alloca-
tion duties, the government would progress from an activity of lesser to
one of greater competency. Should this change in function take place, it
might proceed by state and local governments imposing a water rights tax

Particular users may also be owners.


1






LAW OF WATER ALLOCATION


designed to absorb all economic rent actually or potentially gained from
the use of water. This tax would encourage owners of water rights to ap-
ply water to the uses that yielded the largest net profit.
Unless present imperfections of market behavior were eliminated, the
most profitable use of water would not necessarily be the use that would
yield maximum net product measured by market prices, or maximum so-
cial product measured by market prices plus supplementary non-price
judgments. Other uses of water, for example, might require higher priced
labor and more expensive raw materials and consequently leave a smaller
margin for owners of water rights although the net product might be great-
er. It is important to recognize that allocation by market pricing may com-
pel the community to sacrifice some real income even though undesirable
income-redistribution effects are eliminated by taxation of windfall gains.
Marketing of water by its owners might fall short of being the perfect
economic device, yet still be quite an improvement over existing methods.
Present rights were established in most of the West during the nineteenth
century, an era dominated by ranching, farming, and extraction. Since then,
the economic character of the region has been changing more manufac-
turing and other urban uses; more pressure on recreational facilities; in-
creasing recognition of the conservational aspects of soil and moisture
use. State law, at least that of New Mexico, seems favorable to shifts in
water from one use or place to another, if economic arguments support
such change; yet in practice, except for requests by governmental units,
the owner of a right to surface water is likely to be enjoined from any
shift in use if other water users protest the change. Consequently, the
present pattern of water consumption is dictated by the economic oppor-
tunities of a half-century gone by. It is for this reason that the allocation
of water by market processes might well lead to an increase in regional
net product, even if such allocation fell short of the optimum.
Measuring the value of water through changes in net product is closely
related to benefit-cost demonstrations made to Congress. Increases in net
product associated with a change in water use indicate the margin available
for water resource projects required to effectuate such change. If net state
product associated with this change is greater than net product without the
change, the benefits exceed the cost. It is possible that offsetting changes
elsewhere in the economy would weigh against the project. However, by
constructing net product with the use of market prices as they are expected
to prevail after the change in water use has been made, it is unlikely that a
result favorable to the shift in use if only the region affected by the project
were considered would be unfavorable if the larger national interest were
at stake. This probable harmony of interest stems from the fact that, for
the most part, changes of the type under consideration are likely to be so
small relative to the national economy that changes in the production pat-
tern will have little effect on the national level of output and structure of






ECONOMIC FACTORS IN WATER USE


prices. If non-price considerations are introduced, this conclusion need
not follow, nor would it be valid to draw this conclusion if a region ex-
erted monopsonistic or monopolistic controls in the interests of its res-
idents.
Another possible difference between traditional benefit-cost analyses
and a study in terms of effects on net product grows out of the treatment
of costs, of which interest and amortization would be an example. A ben-
efit-cost analysis derives both interest and amortization from capital
costs in computing the benefit-cost ratio, even though interest costs are
not considered in establishing the amount to be repaid by certain bene-
ficiaries e.g., irrigators. When we consider the desirability of shifting
water from one use to another, it is conceivable that a project might be
justified even if no profit margin for capital i.e., interest would be
earned. This result is characteristic of many "overhead" investments in
underdeveloped economies and would therefore be applicable to an under-
developed sub-economy such as a particular state. In part, the result
stems from an ambiguity in the method of valuing associated costs. If a
water resource project allows expansion in manufacturing at the expense
of irrigation, should we value manufacturing labor costs at the prevailing
market Wage for manufacturing labor or at a lower level reflecting the
use of labor as agricultural wage workers ? The higher the value we im-
pute to labor, the lower the margin that can be assigned to capital. This
uncertainty of imputation is eliminated by amortizing the capital cost and
looking to the change in net product for guidance in determining the merits
of a change in water use.


CONCLUSION

Economists will see in the foregoing a statistical investigation based
upon generally accepted economic theory. A similar study could be focused
on capital, labor, or some other natural resource, but the relative inelas-
ticity of its supply and the singular method of its allocation among competing
uses lend special significance to water. In spite of the pointed dependence of
the models on the water supply, other components of the economy would not
be ignored. By implication all associated resources of a region are part of
the story, since the productivity of water depends upon the variety and quan-
tity of complementary resources. Each model would contain implicit, as well
as explicit, assumptions regarding complementary resources in addition to
explicit assumptions regarding the use of water. The trick is in estimating
the values of the products of the various resource complexes under different
assumed conditions of demand. So long as the investigation is limited to a
S small segment of the national economy, we can with reasonable safety ig-
nore the effect of changes in regional supply on market price, although full






LAW OF WATER ALLOCATION


account must be taken of the reverse: the effect on national supply of a
change in market price.
A particular array of models would not necessarily reveal the single
best pattern of water use, even if by "best" is meant only the use of water
that maximizes net product. The best might be some unknown pattern not
included in the study. Furthermore, the non-price elements of various
patterns can be compared with each other and with monetary elements
only in a loose and probably inconclusive manner. Opponents of Echo Park
Dam, protectors of Indian rights and wild game habitat, and advocates of
family-size farms all rest their arguments on propositions not readily
susceptible to a price analysis; hence their positions can neither be af-
firmed nor denied on the basis of monetary calculations.
Any attempt to delineate a region's path of growth would be inconclusive
if the study of water use stopped short of examining the market controls
and other influences over the employment of resources used in conjunction
with water. Unless investigation were extended at least tentatively in this
direction, it would be impossible to distinguish between barriers to growth
imposed by water policy and barriers created by other conditions.
Wherever possible, a distinction should be made between average and
marginal net product per unit of water. If it is a question of dedicating
fixed amounts of water to various uses, the average product would be sig-
nificant; if it is possible to vary the proportions among various uses, the
margin product would be significant. For example, variations in the amount
of water available for navigation may bear little relation to changes in in-
come from water transportation. A navigable channel is usually designed for
a specific depth of water; increasing the water supply may even be detri-
mental rather than beneficial to shipping. Reducing the supply of water be-
low a given minimum, on the other hand, will result in a sudden drop of
productivity to zero. Where fixed technical relations prevail, marginal
variations in water use are usually of little consequence. On the other hand,
suppose that a relatively continuous relation exists between increased use
of water and yield of crop per acre. This relation is likely to show an in-
crease in output from a given amount of land as additional amounts of water
are consumed, up to a certain point of water use, and then a decline. The
increase in output might be marked by increasing marginal productivity
over a certain range of water use, followed by diminishing marginal pro-
ductivity as water use increases further, until marginal productivity is
zero. This is the point of maximum output in relation to water use. Where
variable technical relations prevail, the marginal as well as average values
are significant for policy making. It is probable that some continuity in the
variation of water consumption characterizes most uses, lending to mar-
ginal values more significance than to average values. Unfortunately, data
on marginal variation, whether aqueous or pecuniary, are even scantier
than data on average values.







ECONOMIC FACTORS IN WATER USE


The quality of guidance afforded by the results will depend upon the ac-
curacy of the assumptions underlying the models; but even accurate re-
sults can be overborne by the introduction of non-monetary calculations.
In spite of these limitations and shortcomings, the results should serve
as a guide for resource use that can be defended by criteria of public
welfare. Even if this guide were successfully prepared, however, there
would still remain the tasks of creating the machinery and adopting the
legal modes required for putting the blueprints into effect.
Neither the rule of prior appropriation nor the rule of riparian rights
possesses flexibility of control in the requisite degree demanded by the
public welfare. Both are devices adopted by a society guided by lassez-
faire principles to ensure a peaceful determination of who "owns" the
water initially, and, by relatively indirect incorporation into the price
system, (mainly by sale of land rather than water), of how these rights
can be transferred from one user to another. Each provided a simple
and workable solution so long as the scarcity of water was a compara-
tively local and limited phenomenon; which was the case even over the
vast area of the Southwest so long as population was sparse and eco-
nomic activity mainly ranching and mining. While the water was scarce
enough, it was sufficient for those who were there, except during periods
of drought. But now the water shortage has assumed a more ominous
character. It is no longer a periodic visitation occasioned by sub-normal
rainfall; it is a permanent condition, increasing in intensity. The changing
nature of the problem, together with an increase in the area which it
plagues, has put a considerable strain on the old rules, tried and true as
they have been in the past.
Unless the trends of supply and demand take a different turn, a recon-
struction of water law is probably in the cards. When the change has been
completed,, it is likely that the laissez-faire doctrines underlying the pres-
ent rules will have been abandoned. Circumstances may compel the states
to go so far as to reacquire all water rights, paying present owners a
reasonable price, and with these in hand create a corporation designed to
sell water to all users, just as a municipal water company now does; its
operations would parallel even more closely that of a privately operated
state-wide gas or electric utility. The state water corporation and its
subsidiaries would probably acquire all pertinent physical structures, in-
cluding those privately owned, and would be responsible for all new cap-
ital investment in water resource projects. Its activity would be limited,
of course, to the storage, sale and transmission of "public" water, employ-
ing the concept "public" as it now is commonly used in statutory and com-
mon law. The corporation would probably deal with individual users only
in exceptional cases; for the most part it would make its contracts with
subsidiary local water user associations municipalities, rural coopera-
tives, and the like.







LAW OF WATER ALLOCATION


By being itself in possession of all capital structures as well as title
to water, the water corporation would reduce the investment required by
water users, a factor that itself would facilitate flexibility in shift of water
use. Where circumstances warranted, the corporation or its subsidiaries
could enter into relatively long term contracts with final users. These
contracts could guarantee the price, quality, and supply of water for the
duration of the contract, and accept the liability of a suit for damages in
case the corporation could not fulfill its terms. Some users could be
subsidized; others might be charged what the traffic would bear. The
price and investment policy followed by the corporation would reflect cer-
tain of the larger objectives of federal, state, and local government: whether
and to what extent government should participate in economic developmental
and control activities. Ownership of all water by a single agency would
make it easier to give due recognition to effects of the hydrologic cycle
on various sources of water and to minimize the difficulties of conflicting
property rights.
There is ample precedent within the American economy for much more
control by government over the use of water than is now being exercised.
We have commonly tolerated encroachment upon property rights or inter-
ference with free market processes whenever failure to do so would clearly
jeopardize the public interest. As the shortage of water mounts in intensity,
we are likely to put more faith in administrative control as it is exercised
by politically constituted bodies than in the market responses of those who
hold property rights in water.


GLOSSARY

average value of water Where value is established by imputation, the
average value of water per unit of water for a particular use would be
equal to the following equation:
Total Value of Product minus Total Associated Costs divided by
the number of units of product sold. This quantity is then divided by
the Number of Units of Water Used in order to get a value per unit
of water. (However, see value of water.)
economic rents Prices paid for land, labor, capital or enterprise in
excess of the minimum amount necessary to induce sale of these
factors on the market.
elasticities of supply or demand Elasticity refers to the relationship
between a change of quantity and a change in price, other things re-
maining constant. A simple measure of elasticity is equal to the
following: % Change in Quantity.
% Change in Price
gross national product Value of the nation's output of goods and serv-
ices. (See gross productt)






ECONOMIC FACTORS IN WATER USE


gross product Value of the output of an economic system after
eliminating double counting. That is, raw materials are not counted
both in raw form and also in semi-processed or processed form.
gross state product Value of a state's output of goods and services.
(See gross product.)
marginal revenue products Change in total receipts of a business enter-
prise as it expands output by one unit. This is a rough approximation,
but it is clear enough. Where an expansion of output requires the seller
to lower his price, total receipts do not increase in proportion to an in-
crease in output, but by something less, conceivably a negative amount.
Hence marginal revenue product can be positive, negative, or zero.
marginal use The use, such as of water, that contributes the smallest
addition of gross or net product; the "least valuable" of an array of
uses.
marginal value The market value of the marginal use.
marginal value of water As in the case of average value, it is a concept
based on imputation, and for a particular use is equal to the residual
value of that amount of product yielded by the use of one more unit of
water, after subtracting from the market value of the additional product
the associated costs that are incurred.
The marginal value of water can diverge from the average value be-
cause of several circumstances: diminishing physical productivity of
water, change in the market price of the product, change in the pro-
ductivity of associated factors, or change in the prices of associated
factors. (See value of water.)*
market value The money worth as measured by the market price.
market value of the marginal product The price at which one more unit
will sell. This may or may not be equal to the marginal revenue product,
depending upon the slope of the demand curve for the product of the par-
ticular seller.
monopoly A market in which there is one seller.
monopsony A market in which there is one buyer.
net income and net product These terms are used synonymously.
They mean gross product less depreciation charges. The economic unit
to which they refer can be the nation, the state, or some other unit. The
U.S. Department of Commerce reserves "net product" for the value
"gross product minus depreciation" and "national income" for "net
product minus indirect taxes." This terminology is not necessarily the
most useful for analysis at the state level since some of the indirect
taxes constitute income for the state at the expense of consumers out-
side the state and therefore is analogous to "income" of state residents.
oligopoly A market in which there are so few sellers that each seller
has some control over market price.
oligopsony A market in which there are so few buyers that each buyer
has some control over market price.


I






LAW OF WATER ALLOCATION


private and social benefits The concepts are parallel to private and
social costs. Private benefits include those directly assignable to an
individual for which payment is normally expected by the vendor of
the thing yielding benefit. Social benefits are those for which direct
assignment is difficult. For example, good highways directly benefit
operators of truck lines by reducing costs of operation. This is a
private benefit. An additional social benefit is the increase in spe-
cialization within the economy that an efficient transportation net-
work makes possible.
private versus social costs Private costs are those incurred by iden-
tifiable units e.g., the cost of labor to a manufacturer. Social costs
are those incurred by society as a whole. For example, air pollution
in vicinity of factory may cause disease or dirt not compensated for
by owners of the factory.
state income payments The sum of income payments received by res-
ident persons and businesses of the state. At the national level, transfer
payments e.g., welfare payments are excluded from national in-
come. A case could be made, however, for including at the state level
transfer payments that are borne by out-of-state taxpayers.
value of water This is a concept that is still vague in the writer's mind.
It could mean the price paid for water; it could mean the value of the
product of water after subtraction of costs other than for water; or it
could mean a residual after non-water costs and costs incurred for
water are both deducted. Since, however, associated costs, as well as
costs of water, are themselves dependent on the relative scarcity or
plenty of water, the definition as a residual value exhibits the difficulty
of establishing "value" by imputation. From a "marginal" point of view
it could mean the additional net product that results from having one
more unit of water available without any deduction of costs; this
meaning would make little sense from the point of view of "average
value," however.




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