In spite of the existence of a favorable economic argument for abolishing
the usual statutory ranking of industrial and agricultural uses and for other
changes in preference classifications, inferences with respect to public policy
would be premature without considering the criterion of flexibility jointly
with that of security. The economic implications of water reservations, like-
wise, cannot be fully appraised without considering the criterion of flexibility.
An interpretation of this criterion will be undertaken in a later section (Sec-
tion 4). Before this can be done, our interpretation of security of water
rights must be related to "protection of investment" in water resources develop-
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 eco-
nomic implications of differences in individual water rights and whole water-
right systems are discussed. This emphasis is justified. Most economic im-
plications of security which were mentioned in the preceding section 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" refer
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."1/ The value of
durable physical assets depends on the flow of net income which the assets are
expected to "yield" over time.2/ Assets themselves, however, refer to the
present, and the income flow which determines their value is subject to a time
discount and an allowance for uncertainty. Thus, we are concerned here with
the protection against physical and tenure uncertainties 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
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 de-
creases it for the latter. If a certain type of use--such as municipal--re-
ceives a higher preference ranking than another--such as agricultural--or if
1/ One may differentiate between three forms of assets: (1) physical assets
(natural resources, improvements, equipment, inventories), (2) money assets
(securities, loans, cash), and (3) personal assets (labor, skills, and "good
will" of the individuals or groups who hold assets).
2/ The resale or "scrap" value of durable physical assets at the time they
are sold or scrapped may be formally included in this flow.
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 investment 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
The statement was made in the preceding section that generally (that is,
without taking account of modification through prescription, preferences,
reservations, and physical factors) appropriative rights give greater security
against tenure uncertainty than riparian and correlative rights. This compari-
son 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 respect to invest-
ment 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 protection 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 concept "adequate
compensation." This occurs, for example, if the degree of protection against
tenure uncertainty is affected by prescription, preferences, and reservations.
Prescription does not involve compensation according to law. Preferences and
reservations involve compensation under some laws but not under others .I/ Re-
gardless of the legal aspects,one may raise the question whether and under what
conditions compensation might be considered in public policy as a problem of
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 diver-
sion 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 un-
certain because of his water tenure. Under these conditions, the expenditure may
not be forthcoming, and the water may go unutilized for 20 years.
In such a situation, a guarantee of compensation for nonrecovery (because 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 eco-
nomically warranted from the standpoint of public water policy is not self-evident
but can be ascertained by benefit-cost analysis.2/
_1/ The constitutions of Idaho and Nebraska grant preferences in time of scarcity
of water, first to domestic uses, second to agriculture, but make exercise of the
right contingent on payment of compensation. The Colorado constitution grants simi-
lar preferences without mention of compensation; but the Colorado Supreme Court has
held that, despite that provision, full compensation is required. Statutes of Ore-
gon and Utah give similar preferences in time of scarcity without mention of compen-
In Texas, reservation does not involve compensation, although there is a dif-
ference 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 Bights in the West (Washington, D. C.: 1942), especially
pp. 337-358. (U. S. Department of Agriculture Miscellaneous Publication No. 418.)
2/ Ciriacy-Wantrup, S. V., "Benefit-Cost Anslysis and Public Resource Develop-
ment," Journal of Farm Economics, vol. XXXVII, no. 4, November, 1955, PP. 676-689.
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 munici-
pality 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
expenditures for durable assets are in the public interest, although they
may not be economical for private water users, and (2) that the most economical
alternative for public policy to develop water resources is a guarantee just
sufficient to induce private development. There is no implication 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
categories 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 needs
of the community--stands in fair relation to its price. During the twentieth
century, the trend in legal thinking has been to answer this question in the