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
  owners 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 Natl 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?
RentB600
/bushel
RentC0
RentA1000
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)
L
LA
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)
L
L2
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
State Acres (000) flood spray drip
California 9,480 74 19 7
Nebraska 7,450 47 53 0
Texas 6,310 56 43 1
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
0
U
A0
0
100
A
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