Transcript Economics 1100

Ch. 10 Replenishable but Depletable
Resources: Water
Introduction
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How do economic and political institutions
influence efficient water use?
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Politics plays a big role:
“Grapes of Wrath,” by John Steinback
“Chinatown” – movie
“Milagro Beanfield War” - movie
How do we determine the efficient
allocation of water among users?
Potential for Water Scarcity
Two sources of water:
 1) Groundwater- underground aquifers
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– most groundwater cannot be recharged; formed
over geologic time; much is overpumped
» in Texas, the Edwards Aquifer (which is rechargeable)
provides San Antonio all of its water
» in High Plains of Texas & U.S., the Ogallala aquifer
(nonrechargeable) supplies all of agriculture. Many are
concerned about it depletion.
» 90% of world’s readily available freshwater is
groundwater. Only 2.5% is renewable.
» 83 billion gallons/day groundwater withdrawals in U.S.
Potential for Water Scarcity
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1) Groundwater- underground aquifers
– California, Texas, Nebraska, Arkansas, and Florida
are largest users of groundwater
– Surface water withdrawals have been relatively
constant but groundwater withdrawals have
increased 14% since 1985 in U.S.
– 1.5 billion people in the world depend on
groundwater for drinking supplies.
– Agriculture is the largest user : worldwide,
agriculture accounts for 67% of groundwater
withdrawals
Potential for Water Scarcity
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2) Surface water- lakes and rivers
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Fresh surface water withdrawals in U.S. are 262
billion gallons per day (ESTIMATED USE OF WATER
IN THE UNITED STATES IN 2000 by Susan S. Hutson, Nancy L. Barber, Joan F.
Kenny, Kristin S. Linsey, Deborah S. Lumia, and Molly A. Maupin U.S. Geological
Survey Circular 1268, U.S. Department of the Interior, U.S. Geological Survey)
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See Figure 2 of report
Efficient Allocation of Surface Water
Efficiency requires that marginal net benefits
are equalized among users.
 MNB0 = MNB1
 If MNBs are not equal, then a transfer from
lower value (MNB) to the higher net benefit
(MNB) will improve welfare
 In Fig. 10.3, during a drought, the efficient
allocation would be to not give any water to
user 0 and give it all to user 1.
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Fig. 10.3 Efficient Allocation of Surface Water
Price
S1 (Dry year)
S0 (Wet year)
A
Marginal Net
Benefits are equal
MNB1
B
Aggregate
Marginal
Net Benefit
MNB0
QB0 QA1= QT1
QA0
QT0
Quantity
of water
Efficient Allocation of Ground Water
In many cases, groundwater is a depletable
resource. This is similar to rising extraction
cost problem in Chapter 7 (Fig. 7.5)
 Pumping will stop when either:
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– 1)water table is exhausted, or
– 2)marginal cost of pumping was either greater than
the marginal benefit of the water or greater than the
marginal cost of acquiring water from another
source
Current Allocation System
During the 1700s in the United States, most
water was allocated by “riparian rights” to the
owner of the land adjacent to the water. This
system was satisfactory with small population
 But, as population grew and moved to the arid
West, it did not work well. The system of
“Prior Appropriation” was developed-- “first in
time--first in right.”
 Prior appropriation was developed by the
miners and farmers who wanted water diverted.
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Current Allocation System
Before 1860, very little government
involvement in water.
 After 1860, government became more involved
in restricting uses of water. Water “belonged”
to state. Claimants only had usufructory rights.
 Since 1902, the federal government has built
almost 700 dams to provide water and power to
help settle the West.
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Sources of Inefficiency
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1) Restrictions on transfers
– difficult to equalize marginal net benefits when
transfers are restricted.
– 1) Beneficial use restrictions: must use it or lose it.
If you conserved water this proved that you
“needed” less.
– 2) Preferential use restrictions: bureaucrat
determines who gets water, not market.
Sources of Inefficiency
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2) Federal reclamation projects
– taxpayers pay for projects enjoyed by users,
primarily in the West.
– Natural Resources Defense Council study found
that Wetlands Water District in California’s San
Joaquin Valley has paid about $10-$12 per acre
foot, only a fraction of the fully amortized cost, less
than 10%. (Acre foot is the amount of water to
flood an acre of level land to a depth of one foot =
325,851 gallons.)
Sources of Inefficiency
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3) Water Pricing: too low for 2 reasons:
– a) average costs are used instead of marginal costs
– b) marginal scarcity rent is not included. Studies of
Tucson, Arizona and Honolulu, Hawaii found that
price did not include scarcity value of groundwater.
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4) Common Property Problem
– many aquifers can be overpumped by users who
face the “use it or lose it” dilemma.
Potential Remedies
1) Eliminate restrictions on transfers. Allow
users to reap the benefits of conserving water
by allowing them to sell the water they save.
 2) Allow instream uses of water to have
secure property rights such as fishing, rafting,
protection of wildlife.
 3) Use increasing block rates to encourage
water conservation and to charge the true
marginal cost of water. See Fig. 10.4 for
different types of variable pricing structures.
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Price
per ccf
(Cents)
Fig. 10.4 Increasing block rate structure
90
80
70
10
20
30
40
Water
Use
(ccf)
Potential Remedies
3 cont.) many cities have used decreasing block
rates in the past. But more are beginning to
use increasing block rates, especially in the
West.
 4) Establish water deeds system
 Don’t forget the politics of water are powerful.
Watch “Chinatown” sometime. You might
enjoy reading example 10.4 about Tucson’s
water problems (not in 8th edition).
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