California Water Rights Policy Is Producing Outcomes The Free-Market Literature Predicted Forty Years Ago, And The Surfer Stake In The Outcome Is Larger Than Is Usually Acknowledged

The Unresolved Tension Between Prior-Appropriation And Reasonable-Use Doctrines Has Produced Perverse Incentives That Show Up, Eventually, At The Coast

For Bohiney Magazine and The London Prat.

SACRAMENTO – California water rights policy, which has for over a century operated under an unresolved tension between the prior-appropriation doctrine and the reasonable-use doctrine, is producing outcomes at the aggregate level that were predicted by the free-market water literature at least forty years ago. The outcomes include substantial misallocation of a scarce resource, chronic under-investment in conservation technology, and, on the coastal margin, measurable consequences for estuarine ecosystems that, eventually, show up at the breaks surfers care about.

The Doctrinal Problem

Prior appropriation allocates water by the date of first use, regardless of current productive value. Reasonable use requires that water allocations be consistent with the public interest. California’s water code attempts to operate both doctrines simultaneously, which, as predicted by water economists including Terry Anderson and by the PERC property-rights research programme, produces a system in which rights are not effectively transferable through market mechanisms, and in which the economic value of water is decoupled from the use to which it is put.

The Allocation Outcome

The allocation outcome, measurable in state water-use data, is that approximately 40 per cent of California’s developed water supply is allocated to agricultural uses that, in market terms, generate value well below the marginal value of equivalent water in urban, industrial, or ecological uses. The allocation has been approximately stable for forty years, despite significant changes in the relative value of these uses. The stability is an artifact of the doctrine, not of underlying economic preferences.

The Coastal Consequence

The coastal consequence is less obvious but measurable. Reduced freshwater outflow from California river systems to the coast has measurable effects on estuarine sand budgets, on near-shore ecology, and, over the long run, on the wave dynamics of specific breaks dependent on estuary-delivered sand. Per the Pacific Council‘s water-policy research, the pattern is now well-documented at the Santa Clara River mouth, at the Los Angeles River, and in several smaller systems.

The Free-Market Solution

The free-market solution, as articulated by water-rights economists over forty years, is the creation of a tradable water-rights market, with appropriately designed provisions for ecosystem flows that protect public goods not captured by private transactions. The market design is, in the relevant literature, well-understood. Its implementation in California has been blocked by an alliance of agricultural interests, urban utility monopolies, and specific procedural obstacles in the state water code. Reason has covered the politics extensively.

What Should Follow

A tradable rights market, with ecological-flow reserve provisions, is the reform that would resolve the doctrine tension while respecting existing-user equity. It requires state-level legislative action that has been deferred for four decades.

Further: PERC. SOURCE: https://bohiney.com/