Title: The Theoretical Background
Full Citation
Permanent Link: http://ufdc.ufl.edu/WL00003198/00001
 Material Information
Title: The Theoretical Background
Physical Description: Book
Language: English
Publisher: The Conservation Foundation
Spatial Coverage: North America -- United States of America -- Florida
Abstract: Richard Hamann's Colletion - The Theoretical Background
General Note: Box 12, Folder 11 ( Conservation Foundation - Symposium Papers on Water Allocation in Eastern U. S. - 1956 ), Item 51
Funding: Digitized by the Legal Technology Institute in the Levin College of Law at the University of Florida.
 Record Information
Bibliographic ID: WL00003198
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.

Full Text


II. 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
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had the highest values.* Concomitant with such flow would be responsive

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 product 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 enterprise--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 satisfac-

tion. One can go one step further: given the adventitious character of income

distribution, relative prices among goods--and hence the satisfaction derivable

from a dollar's worth of expenditure--will not reflect underlying social wants

except by accident. For this reason a change in gross national product measuredby

For explanation of this and other economic terms, see Glossary (Appendix I)

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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

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 segments of the economy, it

is conceivable that a change in income distribution 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 e n Pn at 1 other

assumptions of a perfectly competitive system need be retained. In fact, the

/ mam problems in with delopment and use of water resources arise

V out of discrepancies between the competitive model and the real world.

The price level is assumed to remain unchanged, at least insofar as change
would be the result of general inflation or deflation.

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


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 immobility,

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, monop 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 between

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 includes

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 income

payments. It is possible that maximum regional net product is associated

with relatively high income outflows, whereas another production 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 designed to maximize

regional welfare. The conflict would disappear if we could assume a highly

mobile population, but in many instances this assumption would be contrary to


III. A Regional Study

An economic study of regional, or, for that matter, national water policy

requires several measurements: the value of water in different uses; gross

state product, net state product, and income payments under different assumed

patterns of water use. The smaller is 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 uses 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,

technology, 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 questions. 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 econcay if water supplies were reduced?
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