The Legacy of Cheap Water

To settlers moving westward, young America's natural resources must have seemed limitless. Appearances were misleading, of course, and even by the end of the nineteenth century many Americans had become alarmed about how quickly their resources were being depleted.

Who was to blame for growing shortages of water, timber, and other resources? The culprits, it was widely believed, were unrestrained private companies and individuals seeking immediate enrichment. But the consensus about the villains responsible for resource depletion fell apart when it came to what, if anything, should be done to protect resources. The eventual answer was to mark a turning point in U.S. resource history.

Proposed remedies divided along two philosophical lines, with very different objectives. Preservationists stressed the isolation of special natural areas from further development, as was done in 1890 with the creation of Yosemite, Sequoia, and Kings Canyon national parks. The conservation movement, on the other hand, emphasized the importance of resource development to long-term growth. Conservationists, too, were concerned about resource depletion, but generally they opposed placing potentially productive resources off-limits to development. Instead they favored reducing laissez-faire approaches and increasing the strength and activity of the federal government. This activist government, they believed, would introduce benevolent, farsighted, scientific resource management, particularly of renewable resources. In this view, one of the government's duties was to prevent waste, and it was wasteful to leave water resources idle that could be producing goods and services like crops or hydropower.

The federal government's role in developing the nation's water resources once was limited largely to the navigation works of the Army Corps of Engineers. But pressures had built over several decades for the federal government to use irrigation to encourage western development, and the Desert Lands Act of 1877 and the Carey Act of 1894 offered low-priced land to settlers who irrigated it. By 1900 many of the better and easily irrigated lands along rivers had been developed, and continued expansion of irrigation required larger investments to construct reservoirs, dams, and diversion canals. Most privately organized and financed irrigation companies came under great financial stress, and many went bankrupt.

Conditions thus were ripe for the conservationist argument that the federal government should be responsible for planning, constructing, operating, and maintaining facilities to store, regulate, and divert water for reclaiming the country's water-short areas. When Theodore Roosevelt became president, the conservationists gained sufficient influence to pass the Reclamation Act of 1902, the purpose of which was to develop the West through water projects designed to reclaim arid and semiarid lands. The Reclamation Service, later renamed the Bureau of Reclamation, was created to carry out the act's mandate.

Tradition versus reality

Water resource development in this century has epitomized the legacy of the conservation movement. To meet the nation's growing demands for water, billions of dollars in public funds have been spent by three federal water-development agencies—the Bureau of Reclamation, the Corps of Engineers, and the Tennessee Valley Authority—and numerous state and local water agencies. The emphasis has been on structural solutions to preventing and solving water problems. At least until recently, the notion that water might be a scarce resource to be allocated among competing uses did not enter the planning equation, and private water markets still are viewed with suspicion.

Under this traditional, structural approach, projected levels of water use are treated as requirements that must be met, regardless of cost. Consequently, concern about water adequacy is translated into support for large, capital-intensive projects, and structural alternatives often are the only ones considered by planners. For example, additional reservoir and water transport capacity are likely to be viewed as the solutions to water-supply problems in the Northeast, an interbasin transfer of water is proposed as the solution to groundwater mining in the High Plains, and a transbasin canal is proposed for reducing salinity in California's San Joaquin Valley.

But conditions have changed markedly since the beginning of the century. In several areas of the West, renewable water supplies cannot keep pace with growing levels of consumption; even in the comparatively well-watered East, demand is bumping up against supply. Pollution of both surface water and groundwater is a burgeoning threat throughout the nation. And so-called instream uses—navigation, hydropower production, recreation, and fish and wildlife habitat—are growing in value as demand for them increases and as social attitudes change about environmental quality. Higher instream values effectively increase the future costs associated with other uses and abuses of water supplies.

Under the combined pressure of growing demand, deteriorating quality, and higher values (and therefore costs), the traditional, supply-oriented approach to water problems is floundering. Current quality and supply problems suggest that the government may not be the wise and benevolent planner and allocator of water resources that the conservationists promised. We are not "running out" of water, as many of the news stories and feature articles often put it, but we are approaching the limits of inexpensive water; that is, water now is an economically scarce resource in most areas of the country, and all the signs point to increasing scarcity. But economic scarcity does not imply a water crisis, headlines notwithstanding. Given a way to allocate water among competing uses—in effect, to treat water as we do other resources and commodities—and given more effective control of pollution, growing scarcity should be an entirely manageable problem.

New approaches

The nation is approaching limits of what can be achieved by increasing supply and therefore should explore what can be done through managing demand. This means introducing market devices into the equation and, almost certainly, higher prices. Any valuable good that is available at no or absurdly low cost will generate high, perhaps insatiable, demand, and that is the case with water. When the quantity demanded outstrips the quantity supplied, as is true nearly everywhere in the West, consumers must be given a reason—an economic incentive—to curtail use. Put bluntly, most farmers, households, and industries will not conserve water until prices force them to do so.

To create water prices more in keeping with supply and demand, it would help to establish well-defined, transferable—that is, salable—rights to water and to reduce restrictions on how and where water can be used. If water could be bought and sold freely, higher-value users like municipal water systems would purchase what they need from lower-value users, like agricultural irrigators. And because irrigation in the West uses so much water—nearly 90 percent of total consumptive use—transfers of water from agriculture to higher-value uses could meet most or all of the needs of the latter without undue damage to the former.

In addition to establishing well-defined, transferable property rights, two other challenges must be overcome if water markets are to be effective in allocating scarce resources to their highest-valued uses. First, appropriate allowance must be made for the public as well as the private outputs produced by water resources. Public, or common-property, goods exist outside the market system. Clean air and water, to take two classic examples of a public good, certainly are valuable, but they usually are neither bought nor sold, regardless of whether a public or a private producer is responsible for maintaining or improving their quality. In general, public goods are nonmarketable because nonpaying members of society cannot be excluded from enjoying their benefits.

In the instance of water resources, fish and wildlife habitat and some other instream uses are public goods that typically are undervalued (or, under western water law, often given no value) in private market decisions. As water values rise, these cases should be evaluated systematically and compared with the value of those uses served by withdrawing water from streams and lakes. Assigning values to water uses that are not priced in competitive markets will not be easy. But the effort must be made and some means created to ensure that these values are not overlooked if scarce water resources are to be allocated among instream and offstream uses in a way that maximizes social benefits.

Second, water transfers often have important effects on parties other than the buyer and the seller. These externalities, in economists' jargon, or third-party effects, are likely to be important when a transfer alters the point of diversion and, thus, the supply or quality of water available to other instream or offstream users. If market transfers are to produce an improved social allocation of water and not just benefit the buyer and the seller, then these third-party effects must be taken into account. The challenge is to achieve this without adding undue cost and delay to the transfer of water supplies among users. Would not institutional and legal reforms that encourage the formation of water markets revive the bad old days of unrestrained greed?

Would not some interests be disadvantaged in the process? In truth, some people may be hurt under a market-oriented approach even if the problems associated with public goods and externalities are resolved. Rural communities where prosperity has depended on the availability of large supplies of low-cost water might be faced with a declining economic base. But many of the advantages forgone originally were conferred through government subsidies of water supplies and through legal restrictions that prevent water from flowing to its highest-value uses—hardly conditions that deserve much support in a society that prides itself on fairness and even-handedness. Moreover, because farmers own most of the rights to water in the West, they would benefit as the value of these rights increases and as constraints on their transfer are loosened.

As for greed, it would seem that it is far from suppressed under a system based on billions of dollars of federal subsidies, privileged allocation, deliberate under-pricing, and chronic shortages. The traditional approach to water allocation worked well when supplies could be provided to new users without harming existing ones, and when an empty West needed to be developed. But those days are gone forever. It is time at least to try a new approach.