Stopping the Drain: Third‐party Responses to California's Water Market

Abstract

Concerns over potential adverse effects of a state-sponsored water market have prompted many rural California counties to adopt ordinances restricting groundwater exports since the early 1990s. Results from panel regressions that rely on original water market and institutional data indicate that these local restrictions have significantly reduced water exports. The optimality of this policy is assessed. In the presence of a water market, export restrictions appear as a low-cost management alternative to common property within source regions. The substantial statewide benefits of a market weigh in favor of broader public support to more comprehensive, nondiscriminatory groundwater management initiatives. (JEL Q25, Q21)

Third‐party effects of water trading and potential policy responses*

“…The policy challenge posed by pecuniary externalities, similar to the challenge arising from agricultural trade liberalisation, is an equity issue (Hanak 2005). If governments wish to intervene, however, constraining trade arrangements is unlikely to be the most efficient and effective mechanism to use.…”

Market-Driven Solutions to Economic, Environmental, and Social Issues Related to Water Management in the Western USA

“…Evidence from California [65] suggests that real estate development may be limited when water rights are transferred. Some rural areas of the West have passed regulation to reduce the transferability of water rights due, mainly, to concerns related to the long-term economic health of source regions of water trades and fears that the loss of agricultural productivity will lead to increased levels of unemployment and other social issues [66]. Popular accounts of local resistance to water transfers [7,67] generally depict such transactions negatively-particularly as related to the perceived loss of long-term economic viability in the source region and to market inequalities; some suggest that such inequities doom the viability of water markets as a solution to the water allocation dilemmas facing western states [68].…”

“…Negative social and hydrological impacts associated with water trades may be short-lived [69]. Aquatic ecosystems may benefit from water markets when in-stream rights are purchased to satisfy environmental regulations or societal interests [66,78]. Farmers in water-depleted regions may switch to low water demand crops or more efficient water-delivery methods [69].…”

Option contracting in the California water market

“…Permanent water transfers in the California water market are associated with both high transaction cost and considerable institutional resistance (Hanak 2003(Hanak , 2005Hanak and Howitt 2005;Zilberman and Schoengold 2005). Members of farming communities whose livelihoods depend on crop cultivation (e.g., equipment sales-and repairmen, marketers, and millers), and those who do not stand to gain financially from the sale of water, may seek political means to block water transfers (Thompson 1993).…”

“…Pinkerton (1999) gives an account of resistance to the allocation of fishing licenses by the local community of West Coast Vancouver Island. Thompson (1993) and Hanak (2003Hanak ( , 2005 describe resistance to the sale of water rights by local communities in the Western United States. Kahn (2000) reports the story of Fijian resistance to the sale of land to American and British companies for timbering of mahogany.…”