Living Economics

The Rocky Ford Ditch, which has been a source of pride to the farmers of Rocky Ford (a village in Colorado), is slowly losing its heritage. The Ditch shareholders, who once feuded among themselves over water use and jealously protected their water rights from outsiders, are now eager to sell out to nearby urban municipalities for large amounts of money. The big cities strewn across the eastern slope of the Rocky Mountains, being hard hit for water, are willing to pay up to three times as much for the water rights to an acre as they would for the irrigated land itself. So farmers who have been incurring losses over the years discovered that their water rights were worth far more than their land alone.

To cite an example: Aurora, one of the many fast growing cities in the neighborhood of Rocky Ford, needs to find 1,000 acre-feet of additional water (An acre-foot equals about 326,000 gallons of water, or roughly enough to cover a football field to a depth of one foot!) every decade. In summer 1999, Aurora offered to pay about $56,000 for each of the approximately 330 Rocky Ford Ditch shares that the city already didn't own.

Water is not the only scarce resource that may be worth more for alternative uses than its originally intended purposes. In the Northwest, electricity intended for smelting aluminum has instead been sold to urban areas during the current California power shortage for nearly 25 times the price it has been contracted for. One such aluminum company, Kaiser, earned about $47 million, by taking the electricity it had contracted to buy at $22.50 a megawatt hour and selling it back to the power generator for $555 a megawatt hour for much of December 2000. Its labor union predicts that electricity sales will reap Kaiser $300 million over the next nine months!

The farmers of Rocky Ford and the aluminum companies have been able to reap windfall gain¹ because of their property rights on unexpectedly scarce resources. Among this bundle of rights is the right to transfer these rights. If their rights are only limited to using these resources for their intended purposes, these resources could not have been deployed for alternative higher-valued uses. Under these more restrictive rights, not only would the right owners be unable to reap any windfall gain, the scarce resources would also not have been optimally utilized.

Ironically, the right to transfer these scarce resources was granted for quite different historical reasons. When the water shares were distributed among farmers way back after the Civil War, the clause of resale was included mainly to facilitate sale of water rights amongst the farmers themselves. Similarly, the low-cost contracts that were signed years ago between the aluminum companies and the power generator, guaranteeing the industry a set amount of electricity at a set price, were generally intended to use abundant power to keep industry and jobs in the region. A clause in the contract, however, allowed remarketing the power in case of low aluminum prices.

Whatever the original intentions for guaranteeing the right to transfer might have been, such right has been extremely instrumental in ensuring that scarce resources are allocated for their most valuable uses. For the lucky owners of this right, right makes might!