Rent, Water, and Common Property

1. Rent, Water, and Common Property Economic valuation of natural resources and problems with managing publicly held resources

2. Grape prices • High grape prices in 2000 caused conversion of oak woodland to grape production, and subsequent decline in price. • Who gains or loses from a increase or decrease in grape prices? • Develop the concept of “Rent” • Applicable to land, water, … all scarce resources!

3. Concepts of “rent” [1 of 2] • Contract rent: payment by tenant for right to use owner’s property • Apartment • Economic rent: payment to a fixed factor above competitive rate of return (payment for a good in excess of its cost of provision) • Fertile agricultural land

4. Concepts of “rent” [2 of 2] • Scarcity rent: premium accruing to a factor of production because it is limited in supply • Willie Nelson • Quasi-rent: Short-run profit that are competed away over time. • New Nat’l Forest policy increases logging

5. An economic model of rent • 3 types of land (A, B, C) • 1000 acres of each type • With $1000 in inputs can produce • A: 500 bushels [cost = $2.00/bushel] • B: 400 bushels [cost = $2.50/bushel] • C: 250 bushels [cost = $4.00/bushel] • Current price $2.00/bushel

6. Who gains from 2x price increase? RentB=600 $/bushel RentC=0 RentA=1000 Farm A: gains $1000 Farm B: gains $600 Farm C: break even Oaks: lose 4.00 2.50 2.00 Bushels 500 900 1150

7. A “living wage” • What are the environmental and ecological effects of a living wage for agricultural workers in SB county? • Depends on • How much workers produce on different types of agricultural land • Think of workers (labor) as an input to production (just like land, fertilizer, etc.)

8. Very large labor supply • With an effectively infinite supply of labor at current wage, w: Output/L MPA MPB MPC wage Labor (L) LA L*

9. Rent to each land type Rents accrue to land type A because labor is more productive on land type A. RentA Output/L RentB RentC wage Labor (L) L*

10. With minimum wage • With minimum wage: • Employment  • Rent  • Type “C” out of • Production (env.). Output/L MPA MPB MPC New wage Old wage Labor (L) L2 L*

11. The economics of water • Allocation: balance between many users and limited resource: • Consumptive uses (residential, industrial, agricultural) • Non-consumptive uses (fisheries, recreational, hydro-electric power, transportation)

12. Consumptive users in US • Irrigation: 39% • Thermo-electric power: 39% • Public supply: 12% • Industry: 6% • Livestock: 1% • Home: 1% • Mining: 1% • Commercial: 1%

13. Top 3 agricultural users

14. Agricultural vs. municipal • Agricultural water heavily subsidized • Price ~ $20/AF, use 80% water in California • Cost to supply ~ $1000/AF • Municipal water • Price ~ $300/AF • Groundwater • Largely unregulated, “open access” resource, few property rights, difficult to enforce pumping laws

15. The Central Valley Project • The CVP carries water from Northern CA to southern CA. Water rights for CVP water follow the land, not the owner. • Which landowners gain from CVP?

16. Who gains from CVP? • Landowners that purchased property prior to CVP gain. • Prior purchase price of land did not “capitalize” the CVP water right. • Future price will capitalize that right. • Rent accrues to property that will obtain rights to CVP water.

17. Imperial Valley/San Diego • High profile water transfer proposed from Imperial Valley to San Diego • Imperial Valley • Desert, agricultural, poorest county in CA • Vast water rights • San Diego • One of richest, largely municipal, high marginal value for water.

18. The economics of water transfer • What does economics have to say about water transfer from agricultural uses to municipal uses? • Allocate a fixed amount of water between the 2 uses. • How do we know when allocation is efficient? • Equi-marginal principle

19. Efficient allocation San Diego willing to pay this for 1st AF $ (A) $ (U) Imp. Valley willing to sell 1st AF for this $1000 DA $50 DU U0 100% U: 0% A0 A: 100% 0%

20. Limit water to control growth? • Some argue that we should limit transfers (prev. slide) to limit growth in urban environments. • Economic solution: If we want to limit growth, should target growth directly (e.g. development tax or TDRs). • That way, get same outcome more efficiently.

21. Did they reach agreement? • Different marginal values should lead to large incentives for trade • Imperial Valley was going to sell about 5% of water allocation to San Diego at price of around $300/AF. • Deal broke down • Concerns over agricultural labor & way of life

22. California & the Colorado R. • 7 states draw from Colorado: • Arizona, Colorado, California, New Mexico, Utah, Wyoming, and Nevada • Dept. of Interior: CA has not lived up to sharing & conservation obligations • Saw Imperial Valley transfer as good thing • If no deal, slash CA entitlement from 5.2 MAF/yr to 4.4 MAF/yr. • Jan 1, entitlement reduced.

23. Allocation by prior appropriation • Prior Appropriations: “First in time, first in use” • Economists criticize open access systems because they lack specified property rights. “Prior appropriations” gives property rights to agricultural users. Is this an efficient way to allocate water between 2 consumptive users?

24. “Prior appropriations” Ag users get first dibs, consume QA units of water at price PA. Urban buys QU at price PU. PAPU so equi- marginal principle fails. Price Urban Supply (S-QA) Supply PU P* PA DTotal DU DA QA Q* QU Water