Living Economics

Water Disputes in California
Ambiguous property rights and high transaction costs may scuttle beneficial exchanges.

Farming ranked ninth (2%) in California's gross state product but consumed 79.3% of the state's development water. The crops grown in California are highly water-intensive varieties like alfalfa, lettuce and cantaloupe though the Imperial Valley is in the midst of the lowest, hottest and driest desert in North America. All the leading contributors to California's wealth are urban industries, and it is urban water districts that receive the smallest share of California's water (The San Diego Union-Tribute, 01/16/1999). Here is a classic case of misallocation of a scarce resource. Efficient allocation requires that water consumed per unit of gross state product be the same.

The Imperial Valley is in fact entitled to take more water than it needs from Colorado River. It could have made more money selling its water rights to the urban areas than using the water for farming. But practically a wide variety of limitations exist upon free exchange of water.

San Diego has been trying to buy up to 200,000 acre-feet1 of Colorado River water a year from farmers in Imperial Valley. One of the obstacles is the dispute between Imperial Valley and Coachella. The issue is that Coachella Valley farmers believe that they were cheated out of 170,000 acre-feet from the Colorado River in 1934 by the Imperial Irrigation District. They are now using the impending water deal between San Diego and Imperial Valley as leverage to force a change in the 1934 agreement. Coachella is threatening to litigate, so there is good chance that the San Diego-Imperial Valley water transfer could be delayed or even scuttled (Los Angeles Times, 09/06/1998).

The Metropolitan Water District (MWD), which is a consortium of 27 cities and other water districts, has also strongly objected to the sale, as its other customers throughout Southern California would have to pay for the shipping costs for water, which is used by only San Diego (Los Angeles Times, 08/07/1998).

Water disputes in California is a classic illustration of the importance of unambiguous property rights in promoting efficient allocation of scarce resources. Without such certainty, scarce resources cannot be sold to the highest bidder for higher valued uses. It also illustrates that beneficial exchanges of property rights may not occur when transaction costs are high due to multiple-party rights.

Note:
  1. An acre-foot is enough for two families of four for a year.
  2. An acre-foot is enough for two families of four for a year.
References:
  • Krist, J. "An urban challenge to water rights" The San Diego Union-Tribune 01/16/1999.
  • McDermott, T. "Water supply deal may end decades-long feud; politics: plan would let San Diego buy from farmers. It requires state voter approval of huge bond issue." Los Angeles Times 08/07/1998.
  • Perry, T. " California and the west; desert valleys renew 64 year old water duel; Colorado River: Imperial and Coachella rivals must settle their quarrel before San Diego can get its increased allotment." Los Angeles Times 09/06/1998.
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