Reflections: April 2020

WATER MARKETING ISSUES

The selling or leasing of water rights within or between the states has been viewed as offering opportunities for flexible and efficient water transfers, but difficulties are envisioned. California was philosophically reluctant to adopt the marketing approach. Even so, a July 11, 1997 Wall Street Journal article on the situation in California was entitled, “Why Markets Seem Inevitable.” At that time, the Federal government was supporting a market approach. In 1995, Arizona created a state water bank, providing water storage for itself and California and Nevada.

ENVIRONMENTAL MARKETS

A recent book by Anderson and Libecap (2014) discussed using market approaches, in depth, [Environmental Markets: A Property Rights Approach, Terri L. Anderson and Gary D. Libecap, 2014, Cambridge University Press.]:

“Environmental economics often focuses on the failure of markets to allocate and manage natural and environmental resources efficiently. Under the banner of externalities, markets fail either because private costs are less than social costs or because private benefits are less than social benefits.”

Either way, there results an overuse of the environmental features or an underuse or an under-investment.

Unless otherwise noted, the quotations in this chapter are from this book.

Generally, remedies are to use taxes, licensing, or quotas to reach the optimal amount of environmental use. It is not clear that the costs of establishing taxation and regulation regimes outweigh the benefits they provide. Taxes and regulations are not expected to produce optimal outcomes, especially when political factors weigh heavily. For example, “fishing season limits have been a common regulatory response to overharvest, but they generally result in twenty-four-hour fish derbies, excessive investment in capital and labor to win the derby, and a glut of fish during the season.” The process of governing affects the future costs of governing, making this recursive (and complex). “Institutionalchoice processes are thus path-dependent.”

“…national parks [are] overused and underfunded and national forest management paralyzed by litigation and the demands of competing groups.”

“As with regulation and taxes, property rights and market exchange are costly, and it may not always be the case that it is socially optimal to solve the environmental or resource problem.”

This book explores how to use property rights and markets to allocate environmental resources, and it compares this to the regulatory

and tax alternatives. It was heavily influenced by the work of Nobelprize-winning economist Ronald Coase and his article “The Problem of Social Costs.”

“We do not contend that markets can solve all environmental problems or that political approaches always fail. Rather we offer a lens through which we can tackle environmental problems using property rights and markets and compare them to the regulatory and tax alternatives.”

One of the book’s goals is to show government leaders and policymakers how to reduce transaction costs to enable the market-based solutions and private incentives to improve environmental quality and productive use.

Government can help shape the creation of markets for willing buyers and willing sellers in the environmental area, such as rights to water usage.

“As environmental economists, we cannot resist the efficiency gains that markets can provide, but we also embrace the potential of markets to go hand-in-hand with financial improvements.”

Environmental conflicts naturally arise between those who have competing uses for environmental resources, whether it’s enjoying clean air and clean water or using air and water to some degree as part of the manufacturing of goods and the rendering of services.

Another conflict is between present and future users of environmental resources, such as the issue of overfishing, a competition between those who want fish now and those who want a sustainable yield in the future. We must consider benefits and costs and different users and different potential distributions of the benefits and costs.

Environmental conflict is especially noticeable in the “tragedy of the commons,” where a lack of ownership of the common resource means that no user has a strong incentive to preserve it, nor an effective means to do so alone.

An example of a common pool resource is groundwater. “Groundwater supplies more than 50% of the drinking water in the United States and is a major source of irrigation.” The users of this groundwater essentially engage in competition, by competitive pumping. It’s like several people sharing a soda with their straws in the same glass. While drinking rapidly has disadvantages, the slow drinker ends up with much less of the soda.

Currently, preventing the over-use of such resources is done by government intervention through regulation and taxation. Just as there can be market failure, “there can be gov’t failure as well when policies are molded by interest-group politics and by political and regulatory changes that may do little for the environment or the provision of public goods.”

In fact, neither government nor market approaches are perfect.

Some consideration should be given to the distribution of the costs and benefits among different classes of people. “Although environmental justice can be portrayed as an effort to provide improved conditions for poor and underserved populations, environmental regulations themselves raise costs and are often regressive.”

Two types of analysis are common: positive analysis, dealing with what is factual, and normative analysis, dealing with what various parties prefer.

The tendency is to over-use the virtually free environmental factors, so that the government is then called upon to restrict this over-use, by setting quotas or fees or taxes, and then perhaps trying to compensate some of those who have lost out due to the government intervention. “If environmental markets are more cost-effective, there are greater surpluses to compensate those who were harmed by the policy.”

For example, development of oil and natural gas sources in the Arctic carries with it some environmental risk, to be balanced against the value of increased energy supplies. Pumping out reservoirs of oil and gas and water deplete these, giving an incentive to those doing the pumping to remove these fluids as rapidly as possible before someone else take them.

In situations where the users of the environment are spread over a large area, they’re often unaware of the impact that they and their distant neighbors are having on the environmental resource. Those upstream in a river will have a different perspective from those downstream. As the saying goes, “Where you stand often depends on where you sit.” These parties may be in different governmental jurisdictions, complicating matters further.

Those who enjoy a clean air may have unrealistic requirements, and those who use it may be ignorant or uncaring about the impact of dirtier air on others. The tragedy of the commons is reciprocal.

Access without limitations leads to over-use and under-protection. “… open-access problems persist [because] it is costly to define and enforce rules via regulation or environmental markets regarding who has access, who bears the cost and benefits of decision-making, and who can capture the value of scarce environmental resources.”

Approaches using government for laws and regulations lead to continuing interaction in the public body politic as various interest groups, including “the public,” try to better their positions. Recognizing property rights to certain environmental elements can also lead to continuing competition in the market and in the courts by the parties involved.

Various cap-and-trade schemes make emission limits into property values in themselves.

Making and changing laws and regulations has an impact on the public, politicians, and businesses, so that these becomes the subjects of legal, political, and economic competition. “…regulation is controversial and may not always be the low-cost solution.”

Although taxes can be set to discourage over-use and to compensate those who suffer from the use by others of the environmental resource, the optimal level of taxation is quite difficult to determine. Currently, this taxation approach with compensation has rarely been adopted.

In contrast, well-defined, enforceable property rights give the owners incentives to use the resources prudently, in the present and while considering the future. These rights may be owned by individuals or organizations of one type or another. Prudent use maximizes the benefits to the owner. Innovation is rewarded. Markets often adjust more rapidly to change than can government entities.

Property rights require the owner to be able to identify and legally protect ownership of the asset and to transfer the asset through market exchange. If the costs of ownership and transfer are too high, compared with the value of them, then the definition of property becomes less attractive. Property rights are more readily assignable for static and observable resources such as land than for mobile resources such as river water or hidden resources such as groundwater.

Where excluding others from using the resource is difficult or impossible, government can try to make the use of the resource a right rather than the resource itself, the basis of “cap-and-trade” emissions-limit markets, where more cost-efficient emitters can profit by selling some of their unused rights to emit. The authors give some reasons why cap-and-trade schemes have worked less well than quotas on fishery catches.

Property rights are ownership of an asset that, with the owner paying the costs and obtaining the benefits, avoid the problem of the “tragedy of the commons.”

“There is no simple analysis, however, that can tell us whether markets are better than regulation of vice versa. The answer depends on the relative costs and benefits of alternative institutions.”

They (Anderson and Libecap, 2014) address in detail the example of Mono Lake in California.

Mono Lake (Calif.) --- Riparian Rights

“…Mono Lake [is] an alkaline and hypersaline body of water, 300 miles northeast of the city [LA].

“Between 1941 and 1981, the lake’s level fell about 46 feet and surface area receded from 90 to 60 square miles.”

Environmental groups proceeded to sue to limit Los Angeles’s use of Mono Lake water. Ultimately, a commission ruling held that water diversions were to be stopped until the lake’s level could rebound to a target of 6377 feet. This level is not likely to be met before the year 2021. Many alternatives would likely have been economically preferable in comparison to a wholly stopping the diversions. “Once property rights were rejected, the basis for bargaining was lost.”

“The more secure, durable, and complete are property rights, the more effective they are for limiting losses of the common pool….Ownership can be transferred, and others can be excluded, preventing the losses due to open access.… When transaction costs are positive, property rights are never whole, compensation to aggrieved parties is unlikely to be fully sufficient, monitoring is incomplete, and rent dissipation is never fully constrained. Transaction costs also hold for government regulation.…” One can expect political opposition from those who benefited from open access, for as long as the resource maintains some value. Some of this opposition can be mitigated by compensation. Not only must it be decided who is to be compensated but also for how long and for what amounts. In regulating fisheries, for example, sometimes the surplus equipment has been bought by the government to compensate the owners.

It often takes a crisis of a diminished environmental resource to get the stakeholders to work toward a solution, be it market-driven or government-run. As the value of the resource diminishes, the losers have less to lose and the winners have perhaps less to gain.

Allocating Property Rights

There are four “mechanisms for allocating property rights”: “pure political distribution, uniform allocation, auction, and grandfathering or first-possession.’”

Political distribution works best when the government can be trusted and held accountable. Otherwise, rich resources can be dissipated in supplying political favors to the well-connected.

Uniform allocation, equal sharing, sounds attractive, seemingly providing “equal access” or equal chance of access to qualified claimants. Lotteries work this way. A race to obtain Federal land in Oklahoma ended up being quite costly and of questionable fairness. The Oklahoma “Sooners” are said to be those who left the starting line sooner than prescribed in April 1889 or were on the land already, hiding out. Equal partition is easier to measure than extent of prior use or time of first possession. Lotteries for hunting licenses are examples. If such licenses can be resold, “uniform allocation will ultimately place ownership rights in the hands of those people who value them most highly.” Three issues arise: prior owners, minimal resource values, lack of political advantage to allocating the licenses.

Auctions raise money for the original owners (government or private) and place the resources in those who value them most, as reflected in their bids. They are hard to organize and will be resisted by current private owners.

Grandfathering, the right of first possession, is the “most common allocation mechanism.” Usually the initial ownership was obtained by being first to claim it. Some owners will have invested heavily in using the resource, and having out-competed others, they may be the low-cost, high-value users already. Respecting those rights suggests to others that theirs will be respected also, favoring investment. Criticisms include: not fair to late-comers, gives away “rents” that could go to the government, can produce ownership concentration, and require arbitrary selection of the “starting time” for grandfathering, the baseline period. (To an economist, “rent” is the money that a resource earns above the cost of keeping it in use.)

The authors (Anderson and Libecap, 2014) give four sets of examples of the evolution of environmental property rights into markets: “water rights, conservation credits, emission allowances, and tradable fishery shares.”

The rights that are studied are not quite simple property rights but rather usage rights that can be traded as though they were property.

Such rights are not as secure from political interference as simple land property rights are. These use privileges are therefore riskier as investments than simple land property ownership is. This weakens the environmental market to some degree. Property rights must be protected from regulatory takings to allow markets to improve environmental quality.

The Oregon Water Trust

The Oregon Water Trust started in 1993 as a nonprofit organization designed to help maintain and restore stream quality using market forces. It required some changes in law to go from the Western principle of “use it or lose it.” Leaving stream water unused had to be redefined as a “beneficial use.” The owners of water rights were allowed to assign them to others for environmental purposes. Many of their rivers and streams were suffering from excessively low flows due to diversions and appropriations.

The Trust worked to develop relationships with all stakeholders. Its focus on the smaller of the streams enabled it to make bigger changes in their conditions. The Trust generally uses short-term leases. The leased water is not removed from the stream, reverting to its original use at the end of the lease. Approximately 30% of the restricted use has been donated and 70% has been obtained through the leasing options.

The authors identify seven conditions that have helped the Oregon Trust be successful: first, the parties must share in the goal of protecting the environmental resource; second, there needs to be differences in the value of the resource between its use in production and its use to protect environmental quality; third, environmental use has got to be recognized legally; fourth, the parties involved must trust each other; fifth, historical uses of the resource must not be placed at risk; sixth, bureaucratic interference must be minimized; and seventh, there must be mechanisms for buyers and sellers to get together, to bargain, and to have such agreements enforced.

Colorado-Big Thompson Project

A second example is the Colorado-Big Thompson Project that brings water across the Rocky Mountains from the Colorado River Basin in the west to the South Platte River Basin in northeastern Colorado. “The Colorado – Big Thompson has by far the most active water market in the western United States in terms of numbers of trades and sales. For this reason, we have more data and can illustrate the nature and timing of exchanges.” The water is traded in uniform water units, each a share of the annual amount of water available from the Project. This will fluctuate annually. The shares are identical to each other. As time has gone on, the urban uses have been more valuable than the agricultural uses, and the market has reflected that. If they have bought more than they need, cities can choose to lease back the units that they’ve purchased in times when agriculture has the greater need. The most active trading is typically moving the water from agricultural uses to urban uses. The values of the shares have turned out to be quite similar, on the average, for the urban and the agricultural uses. Essentially, a market price for water in the region has been developed.

In the future, population growth and increased environmental and recreational demand along with traditional uses is expected to make water scarcer and more valuable in the western states. The impact of any warming trend remains to be determined.

The Development of Property Rights

Before significant human settlement, the river had few users and no real competition, a situation allowing free-access without drawbacks. As competition for the water developed, the problem of “the tragedy of the commons” arose, as some users made others’ uses less valuable. The authors describe the conditions as follows:

• “Scarcity attracts competition to capture resource value.

• Competitors impose costs on one another

• Property rights determine whether and by whom costs are considered in production.

• Clearly-defined property rights encourage bargaining to resolve the problem of competing uses.”

The problems arise when the resource becomes scarce. No one has adequate incentives to improve the common good. Over-use, such as over-fishing and over-grazing result and the resource is depleted, perhaps ruined. Establishing property rights, though expensive sometimes, gives limited access and incentives to the owners to maintain the resource. “Coase argued that property rights assign benefits and costs and promote bargaining….” The parties involved can work out arrangements for sharing the resource or for compensating one who loses some of the use of it. Upstream activities can be modified to accommodate downstream users, perhaps with compensation. Alternatively, downstream needs may make these users compensate upstream users for restricting the upstream use. Often it is not clear who has the “right” to how much and how to use the resource when others have competing uses. The authors comment that agricultural irrigators compete with downstream fishermen for water, and it is unclear who should be preferred.

“Property rights hold competing uses accountable for the opportunity cost of resource use because the owners must consider what others would be willing to pay for the resource.” “Opportunity cost” is the value of the most valuable alternative that is forsaken. If the transaction costs are low, bargaining could bring about a near-optimal solution among competing uses.

Identifying property rights in environmental factors allows bargaining, “Efficiency and resource conservation are less likely to ensue when property rights and exchange are constrained.”

Problems with Property Rights

In the West, diversion of water flow is the way water is claimed as property, showing “ownership” and beneficial use. “.…priority is given to those with the earliest claims.” The Oregon Water Trust, now the Freshwater Trust has handled negotiations between agricultural users and those with fishing interests downstream. Allowing water to remain in the stream had to be defined by law as a beneficial use.

Costs of defining, enforcing, and trading property rights can outweigh the value of doing so. Political considerations may be limiting factors, too.

Factors determining the value of creating property rights in a resource:

• Resource value: more valuable items warrant more expense in defining them as property. Historically, panning and mining for gold quickly led to establishment of claims and rights to locations out West, followed by passage of laws to enforce these.

• Physical characteristics of the asset/resource are important. Boundaries are needed.

• Stationary, observable resources are more easily defined than movable or hidden assets. Fences may suffice. Global Positioning Satellites may enable easy unambiguous determination of locations and extents and the whereabouts of potential trespassers.

• Mobile or unobservable resources are harder to define and defend. “ownership of deep-vein hard rock minerals is assigned to the surface property owner where the vein breaks the surface…. Similarly, access to groundwater and oil and gas deposits are granted to surface land owners who obtain ownership by pumping. Further, surface water rights are defined by proximity to water under the riparian doctrine, which gives land owners adjacent to a stream the right to an undiminished quantity and quality of water, or by the measurable diversion of water under the prior appropriation doctrine, which establishes rights to fixed quantities of water on a first-in-time, first-in-right basis.” And international law gives special rights to coastal countries over ocean areas adjacent to their shores, as exclusive economic zones (EEZs). Where resources are highly mobile and not highly valued, it is less worthwhile to try to define property rights in them, which explains some of the difficulties for handling air and water pollution this way.

The costs of trading: defining, enforcing, negotiating, communicating, inspecting, measuring, verifying, writing of contracts…all these activities add to the cost of trading property and property rights. Easements represent an uncomplicated way for an outsider to have some say in how a property is used and many land trusts use these.

Government as a transaction cost reducer: Laws and regulations can simplify the adjudication of disputes.

Defining and enforcing property rights: “By enforcing property rights, government can encourage investment, encourage exchanges, and align incentives to move resources to higher-valued uses.” For example, in 1974, the newly ratified Montana State Constitution set up specific water courts to adjudicate water disputes.

Setting uniform standards of measurement is another way government can facilitate property use. For example, standardizing land property descriptions.

Where defining property is awkward, defining limits on its use may be less so. “…use rights can limit who has access to a resource and thus prevent rent dissipation.” Use rights can be tradable, establishing a market.

Courts can also handle disputes due to third-party claims of being harmed.

Assigning property rights helps restrict access, promote investment and exchange, and prevent wasteful competitive activities. In some cases, assigning such rights may be better than government regulation or tax policies.

Often, establishing such rights comes late in the life cycle of a resource use. Individual Transfer Quotas (ITQs) were adopted twenty years after they were proposed, to manage fishing practices in Iceland and New Zealand. Tradable emission permits to reduce air pollution took thirty years to be established in the U.S. The ITQs and quota are not fully property and lack some of the advantages thereof.

Property rights need government endorsement and protection and support, including enforcement.

To prevent losses due to open access requires limiting some use, opening the issue to politics and law. Equity (fairness) issues can clash with the possible benefits from creating rights to resources and their use.

As time goes on, some waterways have become more important as recreational resources than agricultural, for example. Fishing requires more flow rather than less, in competition with agriculture. In Montana, waterways are common resources, available to all. A series of court battles were waged between the riparian (shoreline) users rather than recreational users (visiting fisherman). Owners of the Mitchell Slough returned it to agricultural use by cutting off its flow periodically, lessening its value and availability for fishing. The Slough had no “rights” allocated to “owners,” thus preventing any bartering and bargaining to share the water between farmers and fishers.

“The more secure, durable, and complete are property rights, the more effective they are for eliminating the losses of the common pool.” To get public acceptance it is good if the proposal is consistent with historical use, seems fair, and/or compensation is paid by the winners to these who suffer loss. Sometimes, the compensations can greatly offset the added value of the new arrangements. Transaction costs may prove substantial. New conditions can put existing participants at a disadvantage, especially if investments have been made that will be made less valuable. Politics may become paramount. Listing a species on the Endangered Species Act may rule out certain uses of a landowner’s property.

The government’s buying property or equipment from the owners endangered by the changes may mitigate their political opposition. As an example, the Nature Conservancy developed a complex set of rules for fishing along a section of the California coast, which eventually led to creating permits for fishing, permits that could be sold or kept off the market, to control somewhat the harvesting of fish in the area. The permits also limited the methods and equipment that could be used during the fishing season.

The Mechanisms for Allocating Property Rights:

• Political

• Uniform

• Auction

• Grandfathering

Political assignment of claims, such as shares in fisheries or rights to emit specified amounts and types of effluents is common in countries where the rule of law is respected. In such countries, there can be a “resource curse,” as so many special interests claim a share of the potential profits (“rent-seeking”) that the resources are ill-used, and the money dissipated, such as in some oil-rich nations.

A uniform allocation seems fairer, giving equal access, such as through lotteries or homestead distributions in the U.S. West in the 19^th century. Not based on past allocations, the uniform awards do not have to investigate claims of priority and extent. A hunting license is a good example. Uniform allocation with the right to sell or buy them, can lead to the rights getting to those who prize them most highly, by means of their being marketed after the allocation. There are three reasons this method is not used more often: the presence of some stakeholders before the lottery, a relative abundance that makes the lottery not valuable, and that true uniformity makes such allocations have little advantage for political patronage.

Auctions are popular with economists because they get the resources into the control of those who want them the most, and they generate revenues for the government entity doing the auction. Why are they not used more? They are hard to organize, and the distribution of the money they raise produces a new set of political conflicts. Incumbents often feel they should not have to pay again for something they already are using.

Grandfathering refers to allowing the current use to continue, while putting limits on new uses and users. It is the most common allocation method. Here, first-possession trumps other claims, and it recognizes the sunk costs of prior investments in capital and personnel. Early adopters are likely to have developed efficient techniques that help them to be among the lower-cost users. Granting these rights encourages further investment, at least assures that such investment will not be wiped away by a mandated transfer of ownership. Critics dislike disfavoring new entrants and giving away some of the profit (rent) that could be kept for the public by selling the resource to the highest bidder. Ownership concentration is feared, too.

Each of these methods has advantages and disadvantages. Technology improvements make determining boundaries on land and on water less expensive. Carrying out political activities to get public support is not without cost. Rights given by government can be taken away or modified more readily than traditional property rights, especially in cases where major profits emerge.

From Property Rights to Markets

One set of examples comes from water rights practice, where the rights are not “fee simple” rights but privileges of use, somewhat weaker than outright ownership, more susceptible to being modified by governmental or judicial action, thus less secure. The more secure, the more they partake of the advantages of being “property.”

Oregon’s Freshwater Trust successfully entered into various agreements with farmers who had water rights; the farmers agreed to use less water in the late summer in order to maintain stream flows and temperatures at desired levels to protect the fish. The Trust is a private organization, dealing with local citizens who can observe the adherence to the agreements and the improvements produced by the agreements.

Furthermore, Oregon gives government protection for the instream flows to be protected from capture by those not in the Trust. Instream flow became defined as a “beneficial use,” so that the “use it or lose it” principle meant that it is being used, and it is not in the public domain for others to capture. The Trust built a web of relationships with a variety of stakeholders in order to get the legislation passed. During this period, Oregon was experiencing some shortages of water that made the political environment more propitious. Focusing on the smaller streams made the impacts of the Trusts activities more visible.

The Trust uses leases more than permanent purchases of flow rights and has had to do much work to help determine the appropriate prices. A lease means that the owner foregoes usage of the water during the lease period. As confidence in the system has increased, the tendency for longer-term leases has also, and long-term rights are now 30% donated and 70% leased or bought.

These factors are associated with the success of Oregon’s Freshwater Trust:

• The parties agree on the value of preserving the resource.

• The different uses have different marginal values, leading to the likelihood of beneficial exchange.

• The environmental use is recognized as a “beneficial use” and thus protected.

• The parties have mutual trust.

• The agreements do not put into jeopardy other valued uses.

• Government and management are local, familiar with each other and with the conditions

• “There are mechanisms for buyers and sellers to find one another, bargain, and enforce agreements,”

Water Trading in the Colorado-Big Thompson (CBT) Project of Colorado

CBT is a government project (Bureau of Reclamation, BOR) that brings water from the west side of the Rocky Mountains to the east side; that is. from the Colorado River Basin to the South Platte River Basin in northeastern Colorado. It is the most active water market in the West, supplying agricultural, urban, and industrial users. Its water is allocated in tradable, identical shares, each a certain percentage of the estimated annual CBT flow, which varies yearly. The administration is local rather than Federal. The most active trading has been from agricultural uses to urban uses, often as insurance against shortages.

Water Colorado, a firm offering to broker the buying, selling, and leasing of water rights on the river has a site at watercolorado.com/ sell-water.

Individual Fishery Quotas

“Transboundary fisheries are an example of a resource that can benefit from a market solution.” (Anderson and Libecap, 2014) Examples are given for halibut, tuna, and whale market-based limitations. Research shows that fisheries that cross national boundaries are typically overfished, leading to depletion, unless rules are set up. The more countries, the more problems, and the slower-growing, higher-value stocks are most at risk.

The Pacific Northwest halibut fishery area is a fine example, where the U.S. and Canada share the resource. Canada set up a quota system, by vessel (IVQ) in 1990 and the U.S. adopted an individual fishery quota (IFQ) in 1995, with the outcomes of having fewer vessels fishing for a longer season, making fresh fish available for more of the year. The prices for these fish became virtually identical, indicative of an active market. These are “cap-and-trade” systems where a limit is put on the total amount of halibut allowed to be caught, and the rights to catch a certain amount, a quota, are up for sale. Each country’s vessels are restricted to fishing in their home country.

Atlantic bluefin tuna, “the world’s most valuable fish by weight” (one tuna sold for over $1 million) show the problems with preserving a large-area migratory species, with many countries involved in fishing. “Stocks…have steadily declined from historic levels, and current harvests appear unsustainable.” Even though non-governmental organizations have attempted to regulate and apportion allowable, sustainable catch limits, the requirement to allow new entrant countries has meant effectively no limits on the catch. “…the number of ICCAT members grew from nine in 1970 to forty-eight in 2008 with most new members being developing countries.” New rules encouraged new entrants, and the “rights” of the earlier members have become worth much less. Rules exist to prevent the purchase of the rights to harvest tuna on the high seas are accorded to developing countries.

The voluntary International Whaling Commission (IWC) protects the stocks of these mammals for future generations. “Since 1986, there has been a ban on commercial whaling under the IWC’s moratorium. This has sunk the U.S. whaling industry. The Japanese have found some ways to get around the rules, and Russia and Canada and Norway and Iceland have resisted the rules, and an “aboriginal” exclusion exists, as well. About 2000 whales, perhaps even more, are harvested each year. Much international political action revolves around whaling, and in the U.S., the Pelly Amendment allows the U.S. to retaliate economically on countries violating the controlled-whaling conventions.

Determining the optimal levels of the plethora of oceanic whale species has become a heated international political issue. “A tradable quota system with a more collaboratively determined cap for each species offers a potentially viable and attractive alternative.” By agreement, harvest quotas would be set for those species that warrant them, and these quotas would be assigned to countries, who would then assign them to their own citizens, and subsequently the individual quotas would become tradable rights to catch a certain number of whales, rights that could be bought and sold. Anti-whaling groups would be expected to purchase some of these, to further limit the catch, and for the benefit of those from whom the rights are purchased, a win/win.

Conclusions

“Broad, cross-jurisdiction, open-access problems are very difficult to address through the assignment of property rights and use of environmental markets because of the high transaction costs involved.” The barriers include: measurement and bounding, distributing rights and enforcing them and regulating market exchanges. Politicians have short-term goals. Constituencies are at odds. Bureaucrats have their priorities and prerogatives.

Initial allocation of such rights is contentious. Some parties must be excluded. Wealth is to be redistributed. Politicians and bureaucrats do not want to lose their influence. The more heterogeneous the stakeholders, the more difficult the solutions. Still, regulation has many of the same challenges, without the benefit of using the market mechanism to protect and allocate resources economically. A bigger pie, because of more efficient use of the resources, could result in all getting bigger shares, even though the shares are unequal; compensation could reduce the inequality, as well.

WHY ENVIRONMENTAL MARKETS NOW?

Greater tension exists between use of resources and preservation of the environment than ever before. Regulation worked well when benefits were relatively large compared with costs. As diminishing returns occur with regard to command-and-control, market approaches which take costs more explicitly into consideration seem advantageous. Regulation offers many opportunities to political manipulation. Regulation does not tend to encourage innovation nor the rational minimization of control costs for the same degree of environmental benefit.

Setting up market conditions is not free, but once implemented, this has the possibility of rationalizing the costs of control and the impact on various participants. Cap and trade and use quota rights are examples. Property rights facilitate purchase and barter to find optimal allocations.

Clearly, the analysis presented by these authors (Anderson and Libecap, 2014) has advanced the discussion of management of common resources.

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I will be serializing here weekly the Microsoft Word transcription of the final galley proof .pdf copy ot WATER WARS, and the book itself is most conveniently found at amazon.com https://www.amazon.com/Water-Wars-Sharing-Colorado-River-ebook/dp/B07VGNLSMX/ref=sr_1_1?keywords=water+wars+by+carter+and+cooper&qid=1577030877&sr=8-1

or at DWC's amazon.com author's book title list https://www.amazon.com/s?k=douglas+winslow+cooper&i=digital-text&ref=nb_sb_noss

Reflections

Monday, April 20, 2020

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Friday, April 17, 2020

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Saturday, April 11, 2020

WATER WARS, Ch.7, "Environmental Markets"