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02/25/2007

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ben

I am in agreement with the main messages of these posts. This may seem like an odd point, but it isn’t clear why global warming is mentioned by both Posner and Becker. Taking institutional arrangements as given, the greater drivers of a divergence between supply and demand of fresh water will be population growth and higher water intensity per capita in developing countries.

Global warming is projected to increase total rainfall, granting of course that some areas will receive less, its effects will occur gradually and take a long time, perhaps a century or more, to really bite, by which time the world will be a much wealthier and more technically capable place and therefore far better positioned to deal with changes in the supply of fresh water.

This is not to deny global warming, but it seems to me perspective is persistently lacking.

Lawrence Indyk, University of Kansas School of Law

There are differences in applying compulsory unitization principles to water vs oil. In an oil or gas pool, unitization is required not only to prevent inefficient overexploitation of the resource by competitors and high transaction costs, but also to allow for the use of single wells and pressurizers placed in geologically optimal locations without regard to property lines. This yields a significant improvement in the maximum ultimate recovery from the field to the benefit of all landowners as well as the state and economy at large. The physical argument is hard to extend to most water scenarios.

Also in the fossil fuel situation the product is pumped out and transported some distance to buyers and the royalty proceeds are handed out to landowners through some complex distribution scheme. Water, however, is intensively used in irrigation "on site" especially when the resource may be an isolated lake as opposed to a river where rights can be sold to up/downstream users. The kind of royalty distribution system for profits may not be efficient for use and there would still need to be some kind of auction/market mechanism among the unitized owners to allocate water utilization efficiently.

The ultimate unitization, of course, would be would be to abandon individual or appurtenant property rights in meltwater and treat precipitation as a public resource the license to a portion of which could be regularly auctioned off like radio frequencies - the government holding a certain portion for the "minimum flow levels" propagated by environmental advocates.

Gernot Wagner

I certainly agree that many municipal water systems are run inefficiently and that much can be done to improving incentive structures and payment systems, but that does not mean water should be privatized at all cost.There is a very real reason why a city may want to own the water company but not the cable television company. If Comcast decides that providing a particular community with cable is too costly and simply opts not to do it, not much is at stake. If Private Water Inc. decides to improve its bottom line by focusing on particular lucrative segments of its customer base, the company gets the profits and the city is stuck with the high cost of providing water for the ones suddenly left out. Water after all is a necessity. Cable -- thanks to foxnews.com for entertainment and comedycentral.com/shows/the_daily_show/ for education -- is not.

ben

Gernot Wagner

That water is valuable is a good reason for seeking the efficiency that comes with privatization.

One method of allaying concerns about private suppliers withdrawing supply from less profitable areas is to do what happens in other network industries, in particular telecomms, which is sell water assets with a universal service requirement.

Profit, to the extent it stimulates supply, is desirable.

Emily

Ben: Water is valuable. Sure. But there is still a difference between valuable and necessary. The profit motive is very powerful and it creates enormous incentives. I'm not sure these incentives would always be in the best interest of the public who depends on reliable, clean water supplies. For example, it may very well be in the profit-maximizing company's interest to come up with imaginable ways to stretch rules concerning water quality.

Haris

Emily
Your concerns are warranted, although they definitely apply to everything people buy and aren't unique to water. You are right to point out that water is a necessity and thus special rules apply. That is, if some people are priced out of air travel, so what? They don't travel. But if some people are priced out of water, well, they don't live. I don't think it's likely that that would happen, but there must be some assurance built into whatever regime is chosen that ensures that everyone has sufficient water to live.

C. Ryan

Gernot's, Emily's, and Haris's points are already answered by Ben, so I only reiterate that a universal service requirement would solve their concerns.

The municipality still owns the water, but as Judge Posner mentions it could "award a contract for the sale of water to whatever provider offers the best deal for the city's residents." That is, All of the city's residents. The municipality would have its own inspectors to make sure people on the outskirts on the politically underrepresented are still being covered, and the engineering and day-to-day operations are left to a private company. The private company will have an incentive to work efficiently because its contract would be up for periodic renewal.

So, Gernot's scenario where "Private Water Inc. decides to improve its bottom line by focusing on particular lucrative segments of its customer base" would be heavily disincentivized by the contract it signs with the city that would, presumably, call for fines and a possible loss of the entire contract.

N.E.Hatfield

There are two basic sources of water available, surface waters i.e. rivers, lakes, ponds, and streams. The other is underground aquifers which require wells, pumps and holding tanks. The problem with aquifers is what is called the recharge rate. Which is the rate at which the water is replenished in the aquifer. In some cases in the U.S. the recharge points occur up in Canada and it takes close to 10,000 years for the flow to occur to those aquifers in the central U.S.. So there is more of a problem than just unitizing the aquifer so to speak. There are transnational problems as well that need to be dealt with. And I won't even go into the problems of urban sprawl that has paved over some recharge zones or polluted the aquifers due to urban storm runoff.

As for the surface water problems, these are a somewhat easier problem to deal with. At least from a legal and technical perspective. But at the end of the day, the issue comes down to the basic fact that we can't pump out faster than the resource is recharged. Unless we want to keep pulling the well strings out, drilling deeper and deeper just to get to the water table to keep things running and satisfy a thirsty population.

Haris

Shaum, you raise some very interesting questions that I will try to address and hopefully clarify.

"1) If water is privatized, would that mean we would approach a system where a certain percentage of the population will simply not be able to afford water? If so, how could privatization be a reasonable or even rational approach to water conservation?"

I assume you mean whether this is good public policy, not good for conservation; pricing people out of water would obviously lower water use since the people who couldn't afford it wouldn't [legally] use it. But that's obviously terrible public policy - pricing people into a water famine is not only inhumane, it's bound to lead to rebellion. That was my concern above. A universal service requirement would help, but I still think there need to be assurances that people can AFFORD the water that they are offered. Given the price of water and the fact that it's a priority in most budgets, I don't see that ever being a problem, but spending more on water could price people out of food, housing, health care, etc. If any good ever needs to be subsidized, I think water is the one.

"2) If privatization leads to a few or just one corporation that controls the water, how would it be efficient if they intentially hold down the supply while driving up the costs to maximize their profit?"

You're describing a monopoly situation. That would be a problem but it is partially alleviated by the "competition for the market." That is, a temporary monopoly in an area that is granted by the local government and renewed on a regular basis. A company that charges too much or provides poor service would lose the monopoly in the next period. Plus, such situations are often accompanied by regulation that prevents the most egregious abuses.

a) would this be the ideal situation, because it would allow for maximum conservation, i.e. few would be able to use water, while others would not use as much otherwise because of price?

A monopoly wouldn't be an ideal situation, clearly. That's basic economics. Monopolies charge too much and don't produce enough. It would help conversation, sure, but overall it would be an inefficient result. On this blog, inefficient = bad.

b) is society really best served by having one or a few corporations profit off the natural resources like the oil companies?

Well, remember that corporations are owned by people, too. Your pension fund, your mutual fund, your portfolio should you be luck to have one, they all benefit from the performance of corporations. I'm not defending corporate malfeasance or such, but I don't think the fact that corporations are the ones winning these contracts is necessarily a bad thing.

c) How would this be different from the situation with big oil?

It's more akin to cable companies, electric services, or gas provision. But I'll let someone else handle this one. Some people love to talk about big oil.

d) If water is privatized, could it end up becoming a focal point for foreign military conflicts?

No more so than before. Where water is very scarce, it is probably already a focal point for wars. If it isn't, it's not going to become one just because it's privatized. If you privatized municipal garbage, I doubt they'd become focal points of wars simply because someone owns them.

Nessie

Test

Owinok

From the perspective of countries whose citizens earn very low incomes, the private supply of water should be a good policy goal. The concern about the possibility that such a water supplier would restrict supply to drive up prices is only remotely possible and highly exaggerated.

Consider that in many of the low-income countries of sub-Saharan Africa, the most indigent urban dwellers spend considerably more for every unit of water than the rest primarily because they are not connected to the main grid. In addition, they have no assurance of the quality of the water.

It is highly unlikely that these people would be further disadvantaged merely by having the city councils hand over water supply and management to a competitive supplier. It may just be that the more affluent could have to pay higher costs by virtue of the fact that they would bear costs that are more closely related to the real costs for their supply.

martin

One thing I do not understand and I would appreciate is someone explains it is the appropriation problem.
Why has someone who has a right on a stream of water to consult with downstream users?
Let's suppose he got a right to 40 appropriating 100 and then returning 60. He can only sell rights for 40, which in no way affects the downstream user. The new owner could not get more than that nor change the quality of the return flow

n.e.hat

martin, Why? Because, that 60 you took, and used, was mine and because of it I lost 100 head of cattle. And now my hands and I are going to have to pay your ranch a visit and burn it to the the ground. Such is the law of the "Wild West". That is, until we got civilized, and aquired a new law code that requires you to consult me first before utilizing my allotment. ;)

martin

Sorry, let me give more detail to the example. I go on a caravan to the west and settle at a river where there is no other farmer, so I am not taking from anyone.
Then I appropriate 100 for irrigation and return 60.
You come downstream after me and take the 60 and return 40, so you have a right on 20.
And so on, what is the problem?
If, as you say, that 60 was yours (because you were there before or because you bought the right) then I have no right to take them and should buy them myself.

chrisn

Excellent points made. I am also surprised by the quite unnecessary mention of global warming.

If one applies even the basic standards of calculus-based physics to global warming arguments, one walks away unimpressed.

You can do better, gentleman.

N.E.Hatfield

martin, That's where the appropriation, allocation and allotment come into play. They are time based, first appropriation, first allocation, first allotment. It's kind of like, first come, first served and the allocation has to be applied for yearly. My alloction dated 1835, your allocation dated 1960. You're way down the list, tough luck dude! The property right is absolute. Out here, that East Coast "Riparian Rights" concept and procedure doesn't apply. ;)

Joel Pinheiro

Judge Posner makes some very intelligent and relevant comments.

I must however disagree on some minor points: first the old argument that having two pipe grids would be "inefficient". I might as well say that having two TV-making factories is inneficient. The labels "efficient" and "inefficient" only have meaning when they reflect the choices of people on the market. Perhaps the expense to make a second grid of pipes is justified; perhaps not; perhaps there are other ways of transporting water than in pipes below the ground, perhaps not. It is futile to speculate on these matters removed from the actual conditions of the market, and thus to make any laws based on these speculations.
And afterall, if a second grid is really inefficient, why bother with instituting a monopoly or cartel in the first place?

My second disagreement is on how to solve the property rights problems associated with ownership of water. Not that I'm an expert or have any clue on which laws are best suited for such a task; it is the way of arriving at such laws which Posner suggests that seems problematic.
Rather than "intelligently designed" property rights, we should try to learn how water is used in practice, and which conflicts usually arise, and how they are traditionally solved, in order to frame the legal rights.

N.E.Hatfield

Joel, They have to certain extent. For the want of a better phrase it's called the "Colorado Plan", but the plan is somewhat different from state to state in the West and S.West. So there is lots of conflict, especially during droughts. These disagreements usually end up in the Federal Courts nowadays. But I have heard of stories where the various Govenors use to call out their state militias to deal with the issue. Made for some colorful times and stories. Most of them fictional, but good stories none the less. ;)

Willliam Rhoads

There was a lot of experience with privatization of urban water systems in Latin America in the last 15 years. The World Bank promoted privatization of all or part of municipal water systems. Partial privatization is having a contractor do the billing, or maintain the pipes, etc. in a public system. I believe experience was mixed. Most systems were in bad shape, had very high water losses, and did not serve the poorest who paid very high prices for water that was trucked in. The problem was financing improvements before the prices were raised. In addition to a lot of demagogery about how water is a right and should be free, the more pragmatic people said "Why should I pay more for water when the service is so lousy?" The worst experience was in Santa Cruz, Bolivia, where Bechtel had a contract for a World Bank project, and raised prices before any improvements were made. This caused severe riots and the project had to be abandoned. I do not know if the World Bank has published any appraisals of its water projects, pointing out what were the reasons for success in its best projects.

Jack

Shaum: The nature of your questions indicates you may understand more than you think you do. Several are grist for a whole essay or debate, so a comment or two.......

I don't understand reasoning utilized in this post, nor the comments. The theory is simply over my head. I'm struggling with trying to put this into a real world example.

So I have a few questions:

1) If water is privatized, would that mean we would approach a system where a certain percentage of the population will simply not be able to afford water? If so, how could privatization be a reasonable or even rational approach to water conservation?

........ Good question! Today's model would seem to be one (in most areas) that of the public "owning" the water resources "in common" with the consumer paying regulated utilities or private companies for the delivery. For the most part, allocations and shortages are handled by the public sector.... ie, HOPEFULLY responsive to political input.

......So what would would be expected of the whole works being "privatized" and somewhat regulated? Would the higher profits of watering golf courses or turning the deserts into arable land take precedence over other uses like residential? or push costs up to "the market?"

One example might be that of OUR public broadcasting airwaves. They too are "free" but in limited supply. They were quickly privatized and sold and resold to the highest bidders. Perhaps rightfully so? as in theory the winners were those making the "highest and best use" in terms of economic returns, which just coincidentally appears to be to appeal to the lowest common denominators as well.

The WERE also "somewhat regulated" with agreements on providing content for 50 mins/hr and selling soap for 10 mins/hr. Also, there were mandates to provide N E W S which until the rise of "Reaganomics" and the retirement of Cronkite were not regarded as additional profit centers.

Then comes a "pro-business" administration and OUT goes the soap/content ratio to be replaced with strictly profit generating "infomercials" and turning the new hour into profitable McNews bites "competing" for market share and deep pocket advertisers.

"What's the latest wrinkle?" New "water wells" have been discovered via the technology shift to digital spectrum which will allow, AT LEAST, two new broadcast channels per each old analog channels with MANY more profit opps as two way communication will allow an internet like ability to simple click on items the consumer would like to buy.

"How was this extra bandwidth allocated?" The worth of these extra channels is estimated at over $100 billion, and even guys as conservative as Sen Bob Dole argued that these belonged to the taxpayer in common and should be auctioned off for their benefit, with a number arguing that the new buyers NOT include current station or network owners so as to restore some competition and provide more diversity. Well, the complex "telcom" bill went off in the dark of night and nothing of the sort took place. Instead existing legions of lobbyists came away with a deal in which existing stations would get the whole works at no cost "in exchange for the one-time cost of upgrading their electronics to the digital standard. VERY Sweet!!

Now IF you'd expect that the costs to the consumer (say in terms of fewer minutes of advertising and infommercials) are likely to go down due to spreading station overhead over double the channels and the profitable direct marketing; I've a yet to be built "Bridge to Nowhere" near my home you might want to buy!

Conclusion: Virtually all regulated utilities have some inefficiencies in that their return is a percentage of what the whole utility costs to operate and the public sector (state and federal policies) might "get it wrong" in either an objective or a subjective perspective but in the delivery of some basic commodities it appears these inefficiencies are negligible compared "deregs" that can and have set the stage for the broadcast model or that of Enron and the CA "energy shortage/crisis". Such seems often the case for water.

2) If privatization leads to a few or just one corporation that controls the water, how would it be efficient if they intentially hold down the supply while driving up the costs to maximize their profit?

............ Ahh yes.....! You'll note former oil magnate and "corporate raider" T. Boone Pickens' sagely working to corner water rights in the Texas region.

a) would this be the ideal situation, because it would allow for maximum conservation, i.e. few would be able to use water, while others would not use as much otherwise because of price?

......... I'd think this model has the same problem as that of rises in energy, for most consumers there's very little they can do that will save their hard-earned money in the short and even longer run. Instead, the situation seems to lend itself to community action ie. recent mandates to industry to develop toilets that flush with fewer gallons and could similarly phase in mandates to farmers and other large users to adopt more efficient methods. In Ag these might be carrot and stick arrangements of credits for adopting new tech and "water guzzler" taxation on those not adopting.

b) is society really best served by having one or a few corporations profit off the natural resources like the oil companies?

......... As others here, I'd suggest oil is a VERY different situation. Also that some of the pitfalls of oil pricing should be a warning on water. Oil is different in that it IS a high stakes gambling on finding oil, and as reaching out to Alaska's furthest and harshest regions show, it's becoming a major gamble to get the stuff to market. These are areas that are ideal to harness the powers of capitalism to raise capital and provide cutting edge knowledge to be rewarded with some great losses, some breakevens and some major windfalls. (Now IF there WERE some way to keep them from buying built-in profits FROM "their" Congressmen!)

On the pricing warning? Today both Alaskans and L-48 consumers are paying $50 for oil that costs less than $20 to produce. Even worse the "world price" is set, not by the highest cost producers, but largely by the lowest cost producers; Saudi Arabia where production is $10?? Surely we do NOT want to copy this rigged game for our water supply and pricing!!! "Hey! "they're" getting a buck a gallon in parched areas of Israel! Therefore?

c) How would this be different from the situation with big oil?

....... you and I have SOME political power in regard to public water utilities. Do you have ANY power at an Exxon shareholder's meeting? BTW.. this outfit is looking for favorable treatment in Alaska on production and gas pipeline but STILL has not settled its obligations to Alaskan fishermen and others who were heavily impacted by the massive spill; a dozen years and a number of the claimants have passed on. And! Exxon and BP are playing cute for as many "extras" as they can get on the proposed gasline....... that SHOULD have begun 5 years ago and could have soon brought 8% of US NG to the lower 48. YOU are paying a hefty premium for their purposeful foot dragging. Give you any ideas of how "big" anything will "treat us?"

d) If water is privatized, could it end up becoming a focal point for foreign military conflicts?

........ Not likely in North America, but it IS predicted to be the NEXT "war" (if not already a factor!) in the M/E and other water-short areas.


.......... anyway.......... a few comments FWIW.

Thank you for the topic Judge Posner and Prof. Becker, and to the commentators.

David

I admit to not knowing much about water rights. But it seems to me that Posner is repeating a "neocon" myth, embraced by the current administration, that contracting out government functions is more efficient than having them run by a civil service. I dare say that Katrina, Iraq, and a horde of other examples over the past few years should put that myth to rest.

Hiring a private contractor to run city water systems is likely to add to, not diminish, the bureaucracy. It merely replaces a public bureaucracy with a private one, subject to oversight by a different public bureaucracy. It also adds the need to pay the contractor a profit. And it creates the inherent conflict of a profit motive with the need to provide reliable, universal service.

If a government agency performing a classic government function (for instance, the provision of universally required services through a publicly-owned distribution system) is not running efficiently, the agency should be reformed and streamlined. Replacing it with a private contractor, however, is not likely to improve service or cut costs. IMHO. As support, recent studies, I seem to recall, have shown that competition among energy providers has not, on average, lowered prices.

I think that the true agenda of "contracting" advocates is to reduce the size of the civil service, regardless of whether it might actually be more efficient. Thus all the private contractors, who are essentially replacing the army corps of engineers, that we now have in Iraq.

n.e.hat

Deregulation and privatization! Good Lord! Haven't we relearned our lessons yet? All it's resulted in is increased costs, loss of control and general market instabilities. When Reagan rolled out the new econ. policies, all I could think of was, "Man, are we going to have to relearn all the lessons that resulted in regulation, control and stability all over again?" Looks like it. And now that most industries have been destabilized and are in throes of collapse or massive restructuring via bankruptcy, the target has now become the National infrastructure. Whew!

Jack

Ha! How 'bout this timing! The film "Chinatown" replayed on TBS this week. (For those who missed it.... a great and complex Oscar winning yarn about water rights and corruption set in LA of the '30's.)

Wes

If I think of a free market for water, it would be something like this.An individual consumer logs in to the online water market at the beginning of the week. The consumer has a purchased an inexpensive water testing kit and has determined that AbsoPure brand water from Smith Corporation has 0.002 mg/L lead and 0.0003 mg/L mercury while EconoBulk brand water from Jones Corporation has 0.003 mg/L lead and 0.0002 mg/L mercury. The consumer has conducted a careful cost benefit analysis of the various health risks and decides to buy 100 gallons of AbsoPure water for drinking at $0.05 per gallon and 500 gallons of EconBulk water for showering at $0.01 per gallon.The basic point here is that if water is "privatized" it will be a long way from a true free market. A minor problem is that consumers are going to have a difficult time accurately judging the water "product". There are also two major problems. The first major problem is that the major cost of water is the infrastructure to transport the water. It is simply not feasible for many competing water companies to each provide their own transportation infrastructure (except for high-end drinking water that is transported by truck). The second more fundamental problem is that, in general, pure water is not created from labor but instead it already exists (but usually in an inconvenient location).If all usable water was owned equally by everyone on the planet and corporations had to pay everyone on the planet to take it for themselves for resale then maybe the system would be fair. As it is, some people are going to be born owning water and some people aren't.Anyway, the kind of "privatization" that Posner is proposing is a very long way from the free market. Essentially, some (possibly corrupt) government official will enter into a long term contract with a single corporation to provide water to everyone in a community. The terms of the contract will not be determined by the free market but will instead be just enough to give the corporation a "fair" profit - no matter how inefficient the corporation is.I'm not opposed to looking for ways to replace the government with a free market but what Posner is proposing would be a long way from a free market. It might lead to a small improvement or it might lead to another layer of bureaucracy. If some communities want to try privatization, that's fine. Just don't expect the magic hand of the free market to solve every possible problem.

N.E.Hatfield

Wes, Are you aware that there are approx. 60 parameters that have to be tested for, running the gamut from, turbdity, pesticides, herbicides, to toxic heavy metals and radioactivity, just to name a few, to qualify as potable water here in the U.S.? And you expect John/Jackie Q. Public to understand it? Good luck. That's why we have a regulated utility set up in the first place.

I'll take a somewhat ineffcient governmental controlled water distribution system over a privatized profit system any day. At least the pricng and quality of the product supplied is stable from day to day.

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