Special Challenges to Water Markets in Riparian States

• Publication year: 2010

Special Challenges to Water Markets in Riparian States

Joseph W. Dellapenna

Introduction

Georgia, especially the Atlanta region, has encountered recurring and increasingly severe droughts.[1] Phenomenal growth has compounded the water shortage problem.[2] Georgia has also become embroiled in legal disputes with neighboring states over their shared water resources.[3] Even the arrival of ample rains did not end water restrictions in Georgia.[4] Georgia's regulated riparian regime should have facilitated its response.[5] Yet Georgia's regulated riparian regime is in some respects undeveloped; in particular, it exempts nearly all "farm uses" from its regulatory requirements.[6] Thus, the underlying legal regime, based upon traditional riparian rights, remains important in Georgia.[7] The resulting complexity of the water law in the State is an impediment to the flexibility necessary for the most efficient and effective response to these growing problems.

In response to the lack of flexibility in Georgia's water management regime, the introduction of markets became a major political issue in Georgia at the turn of the twenty-first century when the Georgia Legislature established a Joint Comprehensive Water Plan Study Committee to consider changes to the State's existing water law.[8] In its final 2002 report, the Committee proposed a bill that would have expressly authorized "permit trading" for water permits.[9] This aspect of the bill became controversial, with the business sector supporting the introduction of markets and with environmental activists opposing it.[10] At the last minute, the Georgia Senate stripped the market provisions out of the bill by a vote of 45 to 6.[11] This led to the defeat of the entire bill, leaving Georgia with no water law reform at all.[12] Although supporters of water markets in Georgia have not given up,[13] resistance to markets in Georgia has grown since the proposal's defeat.[14] Not until May 2004, more than a year after the first bill failed, was Georgia able to enact a program to create a comprehensive state water plan, which might, in several more years, lead to future water law reform.[15]

The Georgia Legislature has already experimented with what some have described as a "market" in the Flint River Basin in the southwestern part of the State.[16] That experiment arose when intense drought caused farmers to withdraw so much water from the Flint River that it was in danger of drying up.[17] The Georgia Legislature reacted by passing the Flint River Drought Protection Act in 2000, which provided for substantial cash payments to farmers in the Basin who forego pumping water from the river and its tributaries for the duration of the drought.[18] Several thousand farmers signed up to receive, in the aggregate, more than $5,000,000.[19] As a result, direct withdrawals from the river and its tributaries declined substantially.[20] None of these measures helped to preserve minimum flows in the included rivers.[21] More important than press reports of irregularities in the administration of the payments (involving the denial of payments to eligible farmers and the making of payments to ineligible farmers),[22] was the failure of the Act to regulate pumping from wells within the Basin. Pumping from wells increased more than the decrease in direct withdrawals from the surface waters, with the predictable result that the water levels in the covered rivers continued to drop precipitously.[23]

When a market works, it is the most efficient mechanism for allocating resources to particular uses, but that system fails if there are significant barriers to the functioning of a market.[24] The experience with the Flint River Drought Protection Act suggests at the least that one must carefully design any attempt to introduce water markets into a riparian jurisdiction, or the law will contradict, rather than achieve, its professed goals. In this Article, however, I explore certain special challenges that will make it difficult or impossible to use markets as a water management tool in a riparian jurisdiction.

I. Why Markets for Water Fail

The central problem with using markets as a water management tool is that water is a "public good."[25] Some now argue that water is not a public good.[26] Which view is right? Public goods share two qualities: indivisibility and publicness.[27] Because public goods are indivisible, one cannot divide the goods up or buy as much as one wants, and one cannot keep others from accessing and enjoying the goods as long as anyone can access and enjoy them.[28] How can you stop others from viewing the blue sky over your property? In sum, a public good is one that all within the relevant public must enjoy more or less equally, or no one can enjoy the good at all.[29]

Generally, public goods must be free goods because one cannot exclude consumers from enjoying the goods.[30] The only costs, if any, associated with a public good are the costs of capture, transportation, and delivery, not a cost for the good itself.[31] If you invest in developing or improving a public good, others who invest or pay nothing will enjoy the benefits of your investment.[32] These "free riders" seriously inhibit investment unless the government, or some other institution, is able to assure that all parties pay for the benefits they receive.[33] The market alone simply will not work; regulation will.

Water is not strictly indivisible and public.[34] Bottled water, for example, is a private good.[35] This example, however, does not resolve whether raw water—water in bulk in its natural condition—is a public good. After all, even economists who argue that water is not a public good use water metaphors when discussing what they concede to be public goods: "common pool resource" and "spill over effects."[36] Moreover, society treats some things as public goods because of their social and economic characteristics rather than just their physical characteristics.[37] If transaction costs are so high that no market can function with even minimal effectiveness,[38] or if society's values require that all receive a "fair" share of the resource, or at least that individuals have access to the good and not be denied because of inability to pay, society will treat it as a public good.[39] Such goods could be termed socially created public goods.[40]

Water is a commodity for which transaction costs are too high to allow large-scale markets, and its importance to human life precludes denying access to those who cannot pay for it.[41] Transaction costs alone will explain why water is a public good; markets for all but the smallest water bodies quickly become cost prohibitive.[42] Transfers of water on a large scale affect many people, making it difficult to procure the contractual assent of all significantly affected persons. Those who advocate that recourse to private markets should be the prime means for protecting instream values miss the point entirely.[43]

Some economists prefer to describe water as a "common good" rather than a public good.[44] Common goods, they tell us, differ from public goods because, while common goods are shared among a group of common owners, the common users can exhaust the goods, and not everyone on the planet has equal access to the goods. More formally, public goods are "non-rivalrous," while common goods are "rivalrous." The consumption of common goods by one person reduces the ability of others to consume the same good, exhibiting some measure of subtractability and excludability, qualities not found in true public goods.[45] With the category of common goods in place, few true public goods exist. Even a lighthouse, often presented as the paradigm of a true public good, is not used by everyone in the world, but only by those on ships coming within range of its light.[46] Perhaps only the blue sky qualifies as a true public good. From a legal point of view, the most central managerial problem regarding public goods is also the most central managerial problem for common goods: How can we recover the cost of maintaining or enhancing a good when a significantly large group of people have access and the legal right to use a good without a direct charge for this use? Both public goods and common goods are "common pool resources" that share this most basic dilemma.[47] This leads directly into the "tragedy of the commons."

Garrett Hardin explained the tragedy of the commons about 35 years ago: Allowing each common owner to decide for herself how to use a common pool resource can only function successfully when the supply consistently exceeds the demand for the resource.[48] Common owners have the power to increase their individual use of the resource and to reap the full benefit of that increase.[49] The whole group, however, shares equally the cost imposed on the common resource.[50] Hardin used cows on a common pasture as his example. For each additional cow an individual owner adds to the herd, he obtains the full benefit of the added cow, while the common owners as a group share the burden of the reduced carrying capacity of the pasture.[51]

Hardin's critics have argued that, through informal limits imposed by small communities sharing a commons, commons have functioned successfully over extended periods in small communities even when use approached the carrying capacity of the resource.[52] These examples are irrelevant for describing how a "common" works in a large society where most persons are strangers to each other, where informal sanctions are not effective, and where formal law recognizes no real limits on any one person's exploitation of the common.[53] In such a setting, users receive the full incremental value of the changes they induce while bearing only a small fraction of the costs.[54] The only rational course for each common owner is to increase use until the users exhaust the resource.[55]

This is more than merely a theoretical model. People have...