Aguanomics

Why we need more economics in water policies

noreply@blogger.com (David Zetland) — Thu, 23 Feb 2012 12:30:00 +0000

The main theme of my book is the need to reform water management institutions that date from a time of abundance, to take rising water scarcity into consideration.

That view may appear static, so here's a dynamic version: We need to manage water efficiently because the velocity with which we are using water is rising. The speed with which we use water is increasing under the twin engines of population growth and economic development. The speed with which water water is circulating in the Earth's ecosystem is increasing under pressure from climate change.

Bottom Line: The combination of faster moving demand and supply requires more exact methods of matching supply and demand in time, place and quality. The reduction of "slack" in the system leaves less room for mistakes, and that's why we need better tools for managing water, and our first choice of tools should come from an economic toolbox because markets and prices are extremely efficient in matching supply and demand with minimal information (remember Hayak).

News flash: Don't worry about drought...

noreply@blogger.com (David Zetland) — Wed, 22 Feb 2012 18:30:00 +0000

...worry about balancing supply and demand.

They are already talking about water use restrictions in SE England in response to two dry winters. That's because there are too many people using too much water from local supplies. One proposed solution is to bring water from Wales to the "thirsty" areas. That's not a solution -- that's just an excuse to grow more demand that will find, eventually, the margin. Remember,

The solution to drought, climate change, environmental flows, etc. is to keep demand below supply. That's a management issue, not a nature issue.

Bottom Line: Don't destroy Nature when you should really be living within your means.

Coyote discusses the same problem -- non-sustainability -- with respect to political spending exceeding revenues. He highlights the hypocrisy of politicians spending like drunk sailors while telling families to tighten their belts. The same can be said to politicians and water managers who mismanage big water flows and then tell small customers to "adjust."

Cheap talk or walk the walk?

noreply@blogger.com (David Zetland) — Wed, 22 Feb 2012 12:30:00 +0000

NB: This post may be one of the most important in the year, in the same way that this one on climate change negotiations led me to conclude that the real price of carbon is zero.*

In my recent keynote talk (38min, 13MB MP3) at the Water Rights and Trading Summit in Scottsdale, AZ, I wanted to spend less time on anecdotes and theory and more time on impact.

I asked participants to "raise you hand if you want water markets in Arizona to work better" (at about 5:30). As I circulated among the tables (it was a lunch talk), it looked like over 60 of the 70 or so participants raised their hands.

I then went on to talk about the problem of transaction costs (TCs), and how high TCs can make it harder to trade water or operate a water market.

From there, I outlined how all of them would benefit from lower TCs, and how policy changes would lower those costs. Water markets in Australia, e.g., are much more "liquid" due to changes in rules on moving water between irrigation districts, registering ownership rights, etc.

I went on to say that the difficulty in lowering TCs was not the time or effort involved in promoting and implementing reforms (usually through some form of lobbying), but finding the right people to put in that effort. The audience for my talk represented a healthy portion of the total population who stood to make direct gains from lower TCs and a better functioning market in Arizona, but which of them was going to put in the time to improve policy?

In my book, I define a collective action problem as the case when...

A small number of people can do a lot of work that benefits everyone. For example, members of Group A could spend a total of 500 hours to save $100 for each person in Group A and Group B. Members of Group B would get $100 in benefits at no time cost. When given the choice of which group to join, most people will join Group B as free riders. The results of this collective action are too few people in Group A, no action, and the continuation of a status quo without savings.

So the members of my audience also faced a collective action problem: who was going to take his own time to move for policy changes that would benefit everyone when it was possible to wait for someone else to do that work?

Luckily, I had a solution to this problem of "first mover disadvantage" that draws on economic research, i.e., a group commitment to act.

So I reminded everyone how about 60 people had agreed that they wanted to improve markets. I then said (paraphrasing)

I want each of you who really does want to improve markets to take out your business card and put it in the hats that are going around. If we collect more than 50 cards, then each card will represent your pledge of $100 towards improving water markets in Arizona. I am not going to handle this money -- we will figure out how to use it later -- but now is your chance to show that you are really committed to improving water markets. If we collect fewer than 50 cards, then nothing happens.

The idea here is that we avoid the collective action problem by using a "threshold" commitment mechanism. If 50 of the 70 or so people signed up, then, first, there would be enough group cohesion to make those few who act feel as if they are supported (the money can work towards that), and second, that there would be enough people in the majority that holdouts may join, so as not to not be left out.

Unfortunately, only 31 people followed my lead by putting their cards in the hats.**

So, no, a bunch of people who said they wanted to improve water markets in Arizona seemed more interested in cheap talk than walking the walk.***

Bottom Line: Water markets do not just make themselves. Market institutions need care and attention to emerge from existing and re-written rules, and their participants need to contribute time towards making those institutions work. Unfortunately, it does not look like Arizona's "market makers" understand how they need to work as a group to improve their markets before they can reap their individual rewards from the function of that market.

* The implication of zero price carbon is not only that most renewable energy projects are a mistake, but that we should put 100 percent of our attention on adapting to climate change.

** I was surprised that Clay Landry (an organizer) did not put in his card, but he said his "card" was setting up and running a conference that cost many times $100. Fair point.

*** By the end of the conference, there were 37 cards in the hat. What shall I do with them or suggest that this group of "doers" do?

NB: This post has been edited to remove some material.

Gleick and Heartland

noreply@blogger.com (David Zetland) — Tue, 21 Feb 2012 21:52:00 +0000

A few people sent me links to the interesting story that Peter Gleick somehow lied to obtain internal documents from the Heartland Institute that showed some sort of "climate denial strategy" (I've not seen them). What do I think, then?

I left this comment on one site:

Although I've had a few "disagreements" with Peter, I don't think this bit of espionage has anything to do with his scientific work. OTOH, there are many aspects of water and climate policy that require one to make subjective decisions on how to weigh various vague elements to come to a final conclusion, a conclusion that is likely to be the only thing that the general public sees or reads. From this perspective, Peter's attempt to "even the playing field" is going to backfire, even if his opponents (they are out there, even if they do not include Heartland) present propaganda as science. No doubt, Peter cares. The trouble is that he sometimes cares too much.

A few more thoughts: I am not in Peter's high profile position, but my personal attitude towards my "opponents" in the water debates is to wear them down with ruthless logic and occasional sarcasm. I've never really thought about trying to undermine their personal beliefs, as those are often founded on a combination of self-protection, experience, selective reasoning and fear. It's for them to work their way out of that mess.

Addendum: Coyote has a good response.

Tuesday funnies

noreply@blogger.com (David Zetland) — Tue, 21 Feb 2012 18:30:00 +0000

Sometimes I feel like this in meetings (other times I am impressed or depressed)

Predictably Irrational -- the review

noreply@blogger.com (David Zetland) — Tue, 21 Feb 2012 12:30:00 +0000

Dan Ariely is a living example of what doesn't kill you makes you stronger. He nearly died in a fire caused by a lab accident when he was in university. In the years of healing and therapy that followed, he started asking more questions about how we perceive pain in ourselves and others. These questions -- and an amazing curiosity -- eventually took him to the pinnacles of academic research in economics and psychology, or what is called "behavioral economics."

I read his Predicatably Irrational just before Christmas last year; it's a fascinating book that makes you think more about our individual views of the world and how those views affect our interactions with others, which means that anyone interested in policy formation and implementation should absolutely read this book. People in advertising, marketing, politics and business should also read it during "work hours" but anyone interest in improving their understanding of "reality, the construct" will benefit from it.*

The chapter summaries at wikipedia give you a good idea of the contents, but they are no substitute for the book, since Ariely is a good -- and entertaining -- writer. I was particularly impressed by these points:

His citation of Mark Twain's Tom Sawyer as an early example of using framing to make a chore into a privilege, i.e., how only special people should be allowed to paint a fence.
His discussions of price anchoring. An iPhone for $399 looks like a deal compared to its old price of $499. We see this in action with water prices, when the price of tap water moves from $2/750 gallons to $4/750 gallons. That move may be from nothing to trivial, but people pay far more attention to the 100 percent increase.
"Free" is much better than $0.01 for a product, not just as a means of lowering transaction costs (I saw a woman use her debit card to buy a $0.85 stamp yesterday), but also as a means of manipulating consumers. Two for one offers can be dangerous.
Along the same lines, he has an interesting discussion of how we are happy to give our time for free, but offended when offered payment for it (my neighbor just took an hour of his Sunday to help me move; payment would have been a bad idea). Ariely reminds us just how socially autistic some economists can be, as when the "busy" professor offered to hire a moving crew for a friend who needed help so he didn't have to stop doing important research (I can't remember his name, because he's not that important).
Sexual arousal does not lead to good decisions (he used some particularly graphic experiments to confirm this).
Money is a useful means of exchange, but money for the sake of money interferes with human relations. Ariely is also a burner :)
People are more likely to share a "free" good (so that others have a chance to get some) than a good that costs $0.01. That's either because they assume payment gives them the right to buy as much as they want (satiating their demand) or that a price signal means a replenishment mechanism exists.
His interesting discussion of associating good feelings (watching a movie) with unpleasant tasks (taking your medicine), to make them easier to stomach (literally, in his case).
His exploration of the "too many choices" problem, using an experiment in which a person faces changing probabilities of payoffs at different doors. Many people cycle among the doors instead of choosing a "decent" stream of payoffs, even when cycling burns up profits. This happens to "optimizers" who try to find the BEST outcome, rather than "satisficers" who stop when they get a decent outcome. I am more happy as a satisficer.
His discussion of "taking" a pencil from work vs "stealing" cash from work. The former is easier to rationalize, even if it's the equivalent. Apply this lesson to stock options (vs. cash withdrawals) or lobbying (vs. bribery), and you will see how people justify corruption in businesses and politics.

Bottom Line: I give this book FIVE STARS, for its clear, knowledgable and interesting exploration of why we do what we do -- and how to improve our choices.

* In the same genre, I also recommend The Moral Sense, The Origins of Virtue and Company of Strangers.

Right, so how shall we do a webinar?

noreply@blogger.com (David Zetland) — Mon, 20 Feb 2012 18:30:00 +0000

There appears to be some interest in an aguanomics webinar. Now we need to decide what that means, i.e.,

Technology: It seems that a conference call, with toll free numbers would make sense in the absence of visual aids. Can this happen via skype or Google+?
Price: I want to limit participation to ten people, with reservations going for $5 (on top of the cost of hosting, if any). Make sense?
Topic: I am thinking of narrowing the webinar to a topic worthy of a one hour discussion, e.g., urban water tariffs, water market, and so on? What's your hot topic?
Timing: I am in Amsterdam, so it seems a good idea to have it in the morning in California, on a weekday. Make sense?
Format: I'd prefer an open discussion to Q&A and Q&A to me talking. How would we manage that protocol?

So please give me your thoughts. I'd like to do these every month or so, with an MP3 archive available to people who cannot participate.

Profitable urban agriculture?

noreply@blogger.com (David Zetland) — Mon, 20 Feb 2012 12:30:00 +0000

This story prompted me to write this to the Economist:

I regret to inform you that Sweet Water Organics has a photogenic, but unprofitable, operation. I visited their Milwaukee site in September last year when I was speaking at a conference devoted to leveraging Milwaukee's freshwater resources into continuing economic growth. Although SWO has captured the heart of politicians and pundits, it is a heavily-subsidized operation that has not been able to compete on a sustainable basis with traditional "dirt" farmers. SWO does not suffer from overregulation or subsidized competition; it suffers from using too many gee-whiz technologies in a market where consumer purchases are decided on a penny-per-pound basis. If you're looking for reasons for business success or failure in the US, then I suggest you spend (even more) time on the dead hand of government regulations that destroy innovation and profitability across multiple industries and the rent-seeking that changes tax revenues into extraordinary profits for industries with effective lobbyists.

Bottom Line: Urban agriculture needs to be price competitive, not a political plaything.

Flashback: 16 -- 22 Feb 2011

noreply@blogger.com (David Zetland) — Sat, 18 Feb 2012 18:30:00 +0000

A year later and still worth a read...

The future of the Middle East -- more freedom of expression but the military is still trying to protect its economic interests (over national interests).

Cities as centers of competition -- ideas that apply when water markets develop or water prices reflect scarcity.

Irrigation 100 years ago -- still true 101 years later...

Utilities DO charge per person in Belgium and Israel. Know any other places?

Friday party!

noreply@blogger.com (David Zetland) — Fri, 17 Feb 2012 18:30:00 +0000

One of many sent by RM [more here]:

Values and markets

noreply@blogger.com (David Zetland) — Fri, 17 Feb 2012 12:30:00 +0000

In my book, I spend a lot of time discussing the importance of our "subjective, personal values" on water management.

Part I is called "personal water choices" because reasonable policies result in efficient and fair outcomes that reflect and reconcile our personal values without impinging on the values of others. Part II is called "social water choices" because our choices affect each other.

That means that I am really annoyed when people want to measure or manage values when it comes to urban, agricultural, and other uses in Part I. Their mission to measure these values is not just a waste of time in terms of operations (compared to mechanisms that reconcile values without knowing what they are) -- they are impossible to carry out. I can't find out how valuable a shower is to you (you may not even know yourself!)

There's an EU project, for example, on measuring "water use efficiency" -- something you can't measure without knowing values!

For Part II choices (environmental water, etc.), its also impossible to measure values, but those values are reconciled via social/political mechanisms -- in the same way that we decide how to manage other social or public goods.

Bottom Line: Values can't be measured; they can be marketed or managed (choose the right tool).

Climate changing

noreply@blogger.com (David Zetland) — Thu, 16 Feb 2012 18:30:00 +0000

Jenny Ross, a reader, just won a World Press Photo Award (nature, first place, singles) for this:

Explanation: "A male polar bear climbs precariously on the face of a cliff above the ocean at Ostrova Oranskie in northern Novaya Zemlya, attempting to feed on seabird eggs. This bear was marooned on land and unable to feed on seals--its normal prey--because sea ice had melted throughout the region and receded far to the north as a result of climate change."

Elasticity in action

noreply@blogger.com (David Zetland) — Thu, 16 Feb 2012 12:30:00 +0000

GS says: "The following graph shows some preliminary data for the impact of our most recent rate increase on consumption – looks from an initial perspective that the rate increase needs to be > 20% to effect some behavioural change [an elastic response]... What is interesting is [how] a rate decrease resulted in increased consumption..."

What you are seeing is a "carefree zone" where customers who saw small changes in prices did not change their consumption by much (statistically the same as zero) and increases/decreases in consumption outside the zone associated with stronger decreases/increases (respectively) in prices.

An academic failure to serve the public good

noreply@blogger.com (David Zetland) — Wed, 15 Feb 2012 12:30:00 +0000

This post is an update on my continuing thoughts about being an effective economist and public intellectual (see this and this). Next week I will discuss blogging as a means of changing ideas and policies, but this post is about the core mission of academics: serving the public interest by improving the quality of our ideas and the way we think.

Unfortunately, it's more of a lament over failure (with diagnosis of its causes) than an optimistic appraisal or recipe for improvement.

Let's start with the assumption that an academic professor or researcher is paid to promote new ideas and teach students.

Now, we need to somehow measure and prioritize outputs. Teaching output is relatively easy to measure (student evaluations and progress), but not as important as research that changes how we think of the world.

Research impact is, unfortunately, difficult to measure. The current method relies on "impact," which basically boils down to publishing in "top" journals. (A top journal is one that other journals tend to cite more often.)

Now it gets ugly, since it's pretty common to just count one's publications and give more weight to those that appear in top journals. The actual content of articles is less important.

The importance of this "publish or perish" model has resulted in a massive increase in the number of papers presenting incremental (often trivial) changes on established themes (supply of ideas) and a proportionate increase in the number of journals accepting less-than-stellar papers (demand for ideas).

This "market" suffers in two ways. First, academics spend very little time on promoting their ideas once they are published. Second, those ideas are often irrelevant to the real world.

The result is too many papers that nobody can read in journals that nobody has heard of. And by "nobody," I don't just mean the public. I also mean other academics. They are often too busy on with their own writing to read. (Very few can even keep track of all the "relevant" papers in their specialty; reading -- when it occurs -- is often limited to the title, abstract and journal name. Only graduate students read articles from start to finish.)

Although I'd prefer that academics change their work ethic to do the right thing (spending more time writing and marketing fewer better papers), I'm afraid that most of them are going to continue to publish irrelevant rubbish. Some do it out of habit (they prefer a system that gave them success) and others don't care about serving the public, but the majority cannot be bothered to spend individual time on a collective action problem that concerns everyone (my preferred solution is here).

That said, there are some small moves in the right direction, towards easier public access to academic journals or becoming more relevant, but nothing big is going to happen until academics must compete to serve the public good instead of engaging in practices that are best described as a circlejerk.

Bottom Line: Academics need to produce and transmit knowledge that's useful to the public. The current system of publish or perish gives them little incentive to do so.

Demand for an aguanomics webinar?

noreply@blogger.com (David Zetland) — Tue, 14 Feb 2012 18:30:00 +0000

Someone suggested that I have a webinar to discuss water issues.

As a format, I'm thinking of

One hour of me answering your (pre-submitted) questions.
Participation fee of $5 to $10 (pay for technology; buy me beer).
Ten to twenty people.
Discussion possible, assuming it's better than my answers :)
Maybe concentrate on one topic per session (urban water prices, irrigation, etc.)
Posting a recording on this blog, after the fact.

Is there demand for this?

If you like the idea, rate this posting five stars (RSS readers need to visit this post).

Comments? Suggestions?

Speed blogging

noreply@blogger.com (David Zetland) — Tue, 14 Feb 2012 12:30:00 +0000

A very nice article on the energy used to pump water in California and Arizona. My favorite part was when the author debunked the claim of California's Department of Water Resources, that energy generated from State Water Project dams in Northern California "reduced" the net consumption of pumping water over the Tehachapis to Los Angeles. Good job!
I am slowly coming around to the idea that crowdsourced feedback on water services may be a good idea (example), but they are neither necessary nor sufficient for good services: good managers or competition are.
Semi-related is this report on mobile payments for water in Africa (can't even do that in OECD countries!) and this MIT project allowing ghetto kids to map their world (and thereby make it safer).
Interesting post on providing incentives for individuals to reduce their burden on stormwater systems (and thus overflows during storms), by giving them credits for local infiltration/retention (or taxing them for the lack thereof). FYI, the Germans already tax properties on their footprint/runoff, unless the owners take action to reduce it.
Drought and shortage may be good for my business (more demand for economists), but I wonder if water managers in areas with below-trend precipitation (most of the US and Europe) are setting up water markets to reduce the harm from the impending drought. Anyone?
In other, not-so-surprising news, offset wetlands are not as good as the real thing. Duh.

Monday funnies

noreply@blogger.com (David Zetland) — Mon, 13 Feb 2012 18:30:00 +0000

Definitely true at some of the conferences I attend (more of activists than academics, btw):

I'll keep count when I'm at the World Water Forum in Marseilles.

We can no longer waste water like Romans

noreply@blogger.com (David Zetland) — Mon, 13 Feb 2012 12:30:00 +0000

I wrote this guest post for the water quality and security blog (please comment there):

Around the world, urban water suppliers use similar technology: the pipes, pumps and valves that move water from central treatment plants to household taps. These pressurized systems are not that much different from the systems that Romans used to supply water to their fountains and baths, with one exception: the Romans left their water running all day and all night. Few of us leave our taps open these days, because water is increasingly scarce — and we don’t want to pay a huge bill for massive volumes of water flowing through our household meter.

But that doesn’t mean that taps aren’t open somewhere else in the system that serves our houses. Leaking pipes drain our water supplies all day and all night. They reduce the water we have for emergency situations, and they increase the bills for everyone who has to pay for water. Water prices are set to cover the total cost of treating and distributing water, even if half that water is lost to leaks.

The industry uses the term “non revenue water” (NRW) to refer to water that’s lost, stolen or not paid for. System losses are usually the largest component of NRW that ranges from 5 percent in a “tight” system to 60 percent or more in decaying systems with poor management of revenue and water flows.

Most water managers know their NRW statistics. Some of them act to reduce NRW — by plugging leaks, metering all users and collecting payment — because they want to run an efficient operation, but others don’t care: why work harder if they can just push more water through the system? That response is not very satisfactory to customers who have to bear an unfair share of the system costs; it’s even less popular to people who worry about the impact of greater water withdrawals from the environment.

Indifferent managers usually pay more attention to NRW when their supplies are limited or when water is expensive. Scarce supplies make it profitable to spend money plugging leaks, to avoid building a desalination plant, for example. Higher prices create three impacts. First, paying consumers use even less water, increasing the impact of NRW (30 units of NRW in total sales of 100 units gets more important if paying consumers lower their use from 70 to 50 units). Second, higher prices mean it’s worth spending more to reduce NRW. Third, higher prices mean paying customers put more pressure on managers to share system costs more widely.

There are many ways to reduce NRW. Some of them require better measurement tools; others require changes in operating techniques. It’s interesting that expensive water gives both consumers and managers the incentive to change their technologies and techniques, as each group seeks a way to reduce, respectively, the cost of their household water and system inefficiencies.

Bottom Line: The end of abundant water means that cannot just run the taps like Romans. We need to close the taps, plug the leaks and make sure that everyone pays for his water use.

Addendum: SD and I had the following discussion over the post:

SD: NRW is a toy for managers; it's not economically sound or sustainable. Take, for example, a utility with 1 million connections and daily production of 300,000m3. If it loses 100,000m3 per day, it loses $50,000 per day (production cost $0.50/m3), or roughly $15 million per year. That may seem high, but it's only $15 per connection per year. Why repair pipes at a cost of $100s of millions to save so little?

Me: You should reduce NRW to avoid spending more on new supplies (if they are even available).

SD: But it's cheaper to ration customers, as they do in Jordan, Lebanon, Syria, Libya, and countries that do not believe in water prices

Me: That's inefficient if it's command and control. If there's price rationing already, then NRW reductions are STILL cheaper than more supplies.

SD: But CnC rationing costs the government nothing; customers bear coping costs, and they are happy to get a drop of water!

Me: Arg!

Flashback: 8 -- 15 Feb 2011

noreply@blogger.com (David Zetland) — Sat, 11 Feb 2012 18:30:00 +0000

A year later and still worth a read...

Your iPhone will not save the world (neither will your iPad) -- read this!

The Company -- The Review -- companies have made us rich, but they shouldn't control politics.

Greenwashing update -- what's your favorite, recent greenwashing headline?

Does IID produce 80% of US winter veggies? I say no; others argued. Still lacking good facts.

Amsterdam -- Love and Hate -- still mostly true - even when it's freezing outside :). Additional loves: 20 min to airport and the BEST parties :)

The Irrigation Efficiency Conundrum -- an excellent guest post exploring similar issues in this recent post.

Friday Party!

noreply@blogger.com (David Zetland) — Fri, 10 Feb 2012 18:30:00 +0000

Note that this is a recent photo:

Image source posted on Facebook

Time to break down Aswan High Dam?

noreply@blogger.com (David Zetland) — Fri, 10 Feb 2012 12:30:00 +0000

During my trip across the Nile Delta in Eqypt, I noticed:

Most agriculture is small scale, with multiple crops on a single hectare.
The military grows crops (!)
Irrigation canals are in poor shape (clogged with plants, etc.)
There's a LOT of hard infrastructure that would be in the way of a "flooding Nile."

A decent view of irrigation canal, a branch of the Nile and farms*

My impression is that Egypt -- which faces food insecurity -- has a few ways to improve its lot:

Change water use incentives, to improve water efficiency and the value of crops per drop.
Consider removing Aswan High Dam (AHD), to release nutrients (replacing artificial fertilizer), restore the Delta ecosystem (improving fisheries**), and increase available water (due to a drop in evaporation -- 25% of ALL flows in Egypt -- in Lake Nassar).

(1) and (2) could both happen, of course. (1) will not if entrenched beneficiaries block it. (2) would be much harder, given the nationalist associations with AHD and greater numbers of special interests, but I reckon that it's the right move. The costs of reduced hydropower, increased flow variability, and significant adjustments to existing infrastructure are worth bearing, given the potential benefits -- esp. if other Nile Basin countries start to use more Nile water. (Does anyone have a study of the potential to bust AHD?)

Bottom Line: Aswan High Dam was not a good idea when it went into service in 1970 and history has shown that it is becoming a worse idea. It's time to restore the Nile and harvest the bounty of its natural flows.

* Here's an ugly view (click to enlarge):

** Here's what fishing ponds look like:

Water rights: diversion or consumption?

noreply@blogger.com (David Zetland) — Thu, 09 Feb 2012 12:30:00 +0000

One of the first complications we run into when discussing water rights is how to quantify them.*

Consider an example of an irrigation canal that carries 100 units of water shared among 10 farmers. If each farmer gets an equal share towards diverting that water, then each farmer can take 10 units from the canal.** But these diversions are not the same as consumption. Irrigation with 10 units of water does not mean that the crops will consume 10 units. Consumption varies with irrigation technology. Drip irrigation may use 95 percent of the water (with the rest evaporating or sinking into the soil); flood irrigation may only result in 20 percent consumptive use -- most of the water flows off the land and back into the canal. These return or tailwater flows mean that 100 units of diversion will not result in 100 units of use; excess tailwaters flow downstream. Farmers who do not like this "waste" tend to allocate water in terms of consumption, so that a farmer with 10 units of consumptive use (and 66 percent irrigation efficiency) may divert 15 units of water to use 10 units. Farmers allocating 100 units of consumptive water will not leave any "waste" to their neighbors (or the environment).

Those are the facts. The interesting question, now, is how best to encourage efficiency among those farmers.***

We can create an incentive to use less water by raising the price per unit of water diverted to the farmer, allowing farmers with a right to 10 units of consumption to sell some of that consumption, or by imposing an assumed "efficiency parameter" on a farmer, i.e., assuming that a farmer with 10 units of consumption rights only needs 12 units of diversion to get 10 units of consumption.

Each of these solutions (individually or together) suffers from an important flaw -- the need to track water consumption. Such tracking is important when a farmer claims he is only using eight units of water and wants to sell the other two or only pay for eight units. It's also a problem when the farmer uses more water than assumed by the efficiency parameter (11 of 12 units, for example).

It thus seems easier to speak in terms of a farmer's water diversion -- something that's easier to measure -- and then ignore the amount of water the farmer uses. Thus, we can have 10 farmers taking 10 units each and ignore their return flows, assuming that anything that makes it downstream is a bonus.**** Such a system would be easier to administer. Efficiency would rise if farmers found ways to increase consumption for each diverted unit (reducing their payments for diversions) or sold their "unused" tailwater to others. Sales of diversion-based water rights outside of the area would tend to cause problems downstream by removing all return flows; such an event could be avoided by quantifying sales/export in terms of consumption, but that number would require measurements of consumption that was not tracked in the past.

These are just some thoughts on how to measure rights for markets or administrative purposes.

Please add your own thoughts, corrections and questions.

* It's worth noting that the word "right" can create emotions out of proportion to their function. It may be better to call them entitlements or licenses, to make it easier to retire "paper water" that will never be allocated with wet water or to facilitate trades by reducing the emotional burden of selling one's "right" (see my discussion in my paper on All-in-Auctions).

** We ignore "head water" flows in the canal that keep the canal wet and make it possible to carry 10 units to each farmer.

*** We are ignoring environmental flows, which are either taken care of separately from the farmers' decisions or are augmented by purchases from farmers who use less.

**** Mike Young, while discussing this point, indicated that downstream users (farmers or environmentalists) would count on these flows as rights. They would object to a decrease in flows that might result from greater efficiency (more use) by the 10 farmers.

The structure of subsidies

noreply@blogger.com (David Zetland) — Wed, 08 Feb 2012 18:30:00 +0000

Useful for framing a discussion (stolen from MSA's presentation)

Ditto*

noreply@blogger.com (David Zetland) — Wed, 08 Feb 2012 12:30:00 +0000

* I agree with this, but I also think it's fine for government to smooth our way by taxing us when we work to pay for OUR education when we are young and OUR pensions when we are old. By that, I mean government programs that are open to everyone but used according to age or need (poverty, healthcare) are better than programs marked for special interests (by industry, geography, etc.). While agreeing with false claims of "compassion," I also see a benefit from a basic -- and easy to access -- safety net. Most existing programs are far too complex.

Insurance vs membership

noreply@blogger.com (David Zetland) — Tue, 07 Feb 2012 12:30:00 +0000

When you buy fire insurance, you pay a monthly fee in case your house burns down. You may "make money" if it does, but few people want that. You pay to offset the bad consequences of a fire.

When you buy a gym membership, you pay a monthly fee for unlimited access to facilities. You "get your money's worth" if you go a lot, so there's an incentive to do so. You pay to get as much exercise as possible.

These differences clarify why people misunderstand "health insurance." It's supposed to be there to take care of you in an accident, but a lot of people try to get their money's worth by using it like a membership. That's why healthcare costs (and insurance costs) are rising [previous post with details].

In the Netherlands, I am required to buy (private) health insurance, but it only covers accidents. Most routine treatments cost money, so I don't get them unless it's worth paying €80 ($100). That's why health care costs less in the Netherlands than in the US.

Bottom Line: use the right instrument for the right problem (incentives matter).