Water rights and the common wealth.

• Author: Freyfogle, Eric T.

Despite a century and a half of opportunity and mounting need, the dominant culture of the American West has not yet adapted to the West's defining physical feature--its aridity. Variable overall yet profound in many places, aridity marks the West as a land different from the humid East, and different too from England, the well-watered home of American legal culture.(1) As English-speaking settlers came to the West's dry places, they re-created ways of life that they knew, ways of life based on the assumption of plentiful clean water. When water ran short, as it did quickly and often, nature was pushed hard to furnish more.(2) Ditches, dams, and reservoirs soon notched the West, followed in time by deep shafts, pumps, and pipelines. Irrigation was able to make the desert bloom in alfalfa, cotton, corn, lawns, and golf courses, but it did so only at the heavy cost of depleted rivers, declining fisheries, salinized waterflows, salt-crusted soils, and altered ecosystems.(3)

Until a few decades ago, Western water was freely available for the taking, chiefly under the rules of prior appropriation.(4) The act of appropriation gave rise to a water right, a form of private property recognized and protected by law. Early users faced only the minimal duty to avoid egregious waste, a standard easily satisfied even by unlined irrigation ditches, unmetered municipal water systems, and groundwater pumping in excess of recharge rates.(5) Users could continue seizing water so long as a single drop remained in the stream or aquifer: No minimum stream flows were maintained; no planning for future needs took place.(6) Looking back today, it is painfully clear that the law allowed too much water to pass into private hands. Too little water was left in rivers to sustain aquatic life, to maintain riparian corridors, and to meet recreational and aesthetic needs.(7)

This legacy of overappropriation now confronts makers of Western water policy. Major shifts are needed in water-use patterns, principally shifts from water uses that benefit individual owners to uses that directly sustain the health of natural and human communities.(8) But can these shifts occur, given that so many water flows are fully claimed by private owners? Can they occur without tinkering with, if not altering greatly, the privileges enjoyed by current water rights holders? Put simply, are private water rights consistent with the common wealth?

Advocates of private property and open markets propose two methods for bringing about the much-needed shifts in water-use practices: voluntary market transfers of water rights and government purchases.(9) The reasoning behind this popular position is four-fold. First, the main virtue of a free market is its ability to guide valuable things to their highest and best uses. As alternate resource uses fluctuate in value over time, the market provides a low-cost, quick-acting way of bringing about transfers. When the market works well, resources end up shifting to higher valued uses, and the lowest valued uses come to an end.

Second, people today value certain water uses more than they used to, particularly instream flow uses for fishing, recreation, ecological integrity, aesthetics, and the like. When allowed to function, the market can meet these new uses. Those who value them can purchase the water they want from low-valued uses, and the change will occur.

Third, some new needs for water are so peculiarly public that no private group is likely to step forward and buy the water needed to meet the needs. In such instances, tax money should be used to bring about the transfers, either through purchases on the open market or by way of condemnation.(10)

Finally--and, for many proponents, most centrally--all of this can occur without tampering with now-vested water rights or with the idea of private property rights in water flows.

Is this reasoning persuasive when applied to the Western land and its people? Can the market bring about major shifts in water-use practices so as to help rehabilitate natural ecosystems? Is it possible for the natural order to be healthy when a component as indispensable as water is subject to the logic, and the laws, of private property?

I.

Like all markets, a water market provides accurate price signals only if the market works efficiently. Water markets, however, face serious limitations because of the peculiar nature of water and its complex ecological roles. Indeed, so pronounced and so fundamental are its inefficiencies that a water market can do only a little--and so far has done little--to bring about sensible resource reallocations.(11) Many of the inefficiencies have to do with imperfect information, transaction costs, and inadequate numbers of willing buyers and sellers. The chief culprit, though, is that of externalities.(12) In market theory, externalities are viewed as minor problems, best dealt with by internalizing them (assuming they are sizeable enough to worry about in the first place). But this simply is not so in the case of water, which is an essential part of an integrated natural community. External costs and benefits are of critical importance, varying from place to place and time to time.(13) In many settings, the external impacts of a water use are greater than the internal ones.(14)

Beyond the sheer quantitative importance of externalities, the market's way of internalizing impacts is by paying money to the person harmed.(15) In the case of water, however, many external harms affect ecosystems and future generations, or are otherwise uncertain in scope and infeasible to calculate or trace. Paying money shifts dollars around among people, but does nothing to reinvigorate the land's health except insofar as it deters harmful conduct in the future. As it now operates, water law largely ignores external harms associated with water uses,(16) and therein lies its flaw. Even if water users were required to pay for the direct, traceable impacts of their uses--a process that could come about, it should be noted, only by way of a major redefinition of private rights--the land would continue to suffer.

Externalities are no small problem under market theory. When externalities loom large and go unremedied, market allocation methods are flawed, sometimes so severely that their very legitimacy is in doubt.(17)

A related assumption in water-rights logic is that, like other commodities, water is transferable, sufficiently so to give rise to a functioning market. A market works with tolerable efficiency only if enough buyers and sellers are present. In the case of water, however, there are problems on this front. The assumption that water is smoothly transferred, from place to place and use to use, is an idea firmly grounded in a pre-ecological era; it is an idea that makes sense only in a realm of economic theory detached from any real waterway or watershed. When we put down the Economics book and wander into the real world, in all its richness and complexity, what we find is that every detail of a given water use has peculiar ecological impacts--where the water is withdrawn, when it is withdrawn, where it is used, how it is used, whether and how long it is stored, and in what way and by how much it is polluted. In the abstract, a water flow is a water flow; it is the fungible widget of microeconomic theory. In real life, the matter is much more complicated.(18)

Instructively, trading water is like trading employees. Like water, labor is a business input, and businesses can and do shift employees from place to place. But water and labor are special kinds of inputs; they are special in ways that distinguish them from steel rods or hamburger buns or software programs. Employees come embedded in local communities; they have spouses that work, children in school, homes that they own, friends and attachments and local people who depend on them. A company can undertake to move its labor input from one place to another, but it needs to recognize that only part of that input will transfer. Even then, transfer costs will be high.

Water flows are every bit as communally embedded as employees--in water's case, embedded in the natural community that includes the soils, plants, animals, microorganisms, nutrient flows, and hydrological cycles.(19) When a water flow is diverted for use in a new location, the impacts spread well beyond the transferring water owner. The surrounding community is inevitably affected whenever a given water use is ended and a new one begun. The change might prove ecologically beneficial--as when more or cleaner water is allowed to remain in the river. Just as easily it can cause ecological harm by further disrupting instream values. But whether for good or ill, the effects of the change are typically widespread. Water law today goes part way toward recognizing this interdependence of water use and local community, conditioning water transfers on rules and processes that pay attention to junior water users and the public interest at large.(20) But the more protection that these processes provide for junior right holders and instream-flow values--and they need to be more protective than they already are(21)--the more difficult it becomes for an owner to transfer water, and thus the more embedded the water becomes in a given place for a given use.(22) Human owners of the water might come and go, but the water stays, locked into historic uses that, as often as not, are inefficient and ecologically damaging.(23)

These first two assumptions of market theory--the unimportance of externalities and the easy transferability of water flows--are plainly related. They are assumptions that make sense only to those who know little about the many roles of water in sustaining all forms of life. A third assumption of market theory is based on an equal dose of ignorance: the assumption that owners of private property take care of what they own. Market theory presumes that property...