Title: Some Problems of Method
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Permanent Link: http://ufdc.ufl.edu/WL00003200/00001
 Material Information
Title: Some Problems of Method
Physical Description: Book
Language: English
Publisher: The Conservation Foundation
Spatial Coverage: North America -- United States of America -- Florida
Abstract: Richard Hamann's Collection - Some Problems of Method
General Note: Box 12, Folder 11 ( Conservation Foundation - Symposium Papers on Water Allocation in Eastern U. S. - 1956 ), Item 53
Funding: Digitized by the Legal Technology Institute in the Levin College of Law at the University of Florida.
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Bibliographic ID: WL00003200
Volume ID: VID00001
Source Institution: Levin College of Law, University of Florida
Holding Location: Levin College of Law, University of Florida
Rights Management: All rights reserved by the source institution and holding location.

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search for maximum product: the division of water by interstate compact,

Indian water rights, riparian rights or rights acquired by appropriation

specific statutory 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 demands for water but non-urban as well, e.g., recreational uses?

IV. 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 economists

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 represent in terms of net product.

An imbalance or lack of parallelism is introduced in the data to the extent

that publicly supplied recreational resources,

NoR 13



--e.g., game fish--are made available largely on a cost basis, costs being

borne partly by the user and partly by the general tax-payer, whereas

privately supplied goods and services are available on a cost-plus-profit

basis, the sum of which is generally borne by the user. 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

society that free market pricing of certain government services--e.g.,

fishing and camping facilities--is an inadequate standard of the contribu-

tions 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 anp-11i- -othe ro m nrntpi cV br1 recoile 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 U1 -- ~

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 re-

source projects would be eliminated in favor of private financing, and the

level of investment in water resource projects would be determined 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 extent

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

projects are likely to earn a higher rate of return on a smaller aggregate

investment than is now the case. The net result of adopting a free market

for water--assuming full employment within the econcmy--vould 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 government 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

allocation 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

S* Particular users may also be owners.


rights tax designed to absorb all economic rent actually or potentially

gained from the use of water. This tax would encourage owners of water

rights to apply 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 social

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 greater. It is

important to recognize that allocation by market pricing may compel 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

manufacturing and other urban uses; more pressure on recreational facili-

ties; increasing 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 argu-

ments support such change; yet in practice, except for requests by gov-

ernmental units, the owner of a right to surface water is likely to be

enjoined from any shift in use. Consequently, the present pattern of

water consumption is dictated by the economic opportunities 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. In-

creases 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 unfavor-

able if the larger national interest were at stake. This probable harmony

of interest stems fran 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 pattern will have little effect on

the national level of output and structure of prices. If non-price considera-

tions are introduced, this conclusion need not follow, nor would it be valid

to draw this conclusion if a region exerted monopsonistic or monopolistic

controls in the interests of its residents,

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

benefit-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 cestat beneficiaries--

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

-i -_ -~-----~


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 underdeveloped 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 ex-

pansion 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 is the value we impute to labor, the lower is the margin

that can be assigned to capital. This uncertainty of imputation is elimina-

ted 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.

V. 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

inelasticity 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 quantity 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 small segment of the national economy, we can

with reasonable safety ignore the effect of changes in regional supply on market

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