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.
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
price, although full account must be taken of the reverse: the effect on
regional 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 scme 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 affirmed nor
denied on the basis of monetary calculations.
Any attempt to delineate a region's path of growth would be in-
conclusive 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
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
significant; 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 income from water transportation. A navigable channel is usually de-
signed for a specific depth of water; increasing the water supply may even
be detrimental rather than beneficial to shipping. Reducing the supply of
water below 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 increase 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 dimin-
ishing marginal productivity 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 marginal values more significance than to average val-
ues. Unfortunately, data on marginal variation, whether aqueous or pecun-
iary, are even scantier than data on average values.
The quality of guidance afforded by the results will depend upon
the accuracy of the assumptions underlying the models; but even accurate
results 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. Bren 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 de ed
by the public welfare. Both are devices adopted by a society guided by
laisse-fiples 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 c artivo v
loc ted phenomenon; which was the case even over the vast area
of the iouhwesc qas population was sparse and economic c ty
mainly ranching and minin 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
reconstruction of water law is probably in the cards. When the change
has been completed, it is likely that the laissez-faire doctrines under-
lying the present rules will have been abandoned. Circumstances may
compel the states to go so far as to reacquire all water rights, and with
these in hand to create a corporation designed to ell 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, including
those privately owned, and would be responsible for all new capital in-
vestment in water resource projects. Its activity would be limited, of
course, to the storage, sale, and transmission of "public" water, em-
ploying the concept "public" as it is now commonly used in statutory and
common 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 co-
operatives, and the like.
By being itself in possession of all capital structures as well as
title to water, the water corporation could operate with maximum flexi-
bility in the public interest. Where circumstances warranted, the corpor-
ation or its subsidiaries could enter into relatively long term contracts
with final users. These contracts can 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 cannot 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 certain of the larger objectives of federal, state, and local gov-
ernment: whether and to what extent government should participate in
economic developmental and control activities.
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 interference
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.
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 quan-
tity and a change in price, other things remaining constant. A
simple measure of elasticity is equal to the following:
SChange in Quantity
SChange in Price
gross national product............Value of the nation's output of goods and
services. (See gross product.)
gross product....................Value of the output of an economic system
after eliminating double counting. That is, raw materials are not
counted both in raw farm and also in semi-processed or processed
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
enterprise 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 increase 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 mar-
ket value of the additional product the associated costs that
The marginal value of water can diverge from the average value
because of several circumstances: diminishing physical product-
ivity of water, change in the market price of the product,
change in the productivity of associated factors, or change in
the prices of associated factors. (See "value of water".)
market value................... .the money worth as measured by market price.
market value of the marginal
product......The price at which one more unit of output
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 particular seller.
monopoly......................a market in which there is one seller.
monopsony.......................a market in which there is one buyer.
and..........................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 same other
unit. The 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 nec-
essarily 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 outside the state and therefore is anal-
ogous 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.
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.
private and social benefits (continued)
Social benefits are those for which direct
assignment is difficult. For example, good highways directly bene-
fit operators of truck lines by reducing costs of operation. Ihis
is a private benefit. An additional social benefit is the increase
in specialization within the economy that an efficient transporta-
tion network makes possible.
private versus social costs......private costs are those incurred by identi-
fiable 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 com-
pensated for by owners of the factory.
state income payments............The sum of income payments received by resi-
dent persons and businesses of the state. At the national level,
transfer paymentS- e.g., welfare payments--are excluded from national
income. A case could be made, however, e including at the state
levelftransfer 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, as-
sociated 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 addi-
tional 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.
;--- -- _____ 1_ ______