rent, water, and common property economic valuation of natural resources and problems with managing...
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Rent, Water, and Common Property
Economic valuation of natural resources and problems with managing publicly held resources
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!
Concepts of “rent” [1 of 2]
Contract rent: payment by tenant for right to use owner’s 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
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 Nat’l Forest policy increases logging
An economic model of rent
3 types of land (A, B, C)1000 acres of each typeWith $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
Who gains from 2x price increase?
500 900 1150 Bushels
$/bushel
2.00
2.50
4.00
RentC=0
Farm A: gains $1000Farm B: gains $600Farm C: break evenOaks: lose
RentB=600
RentA=1000
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 landThink of workers (labor) as an input to production (just like land, fertilizer, etc.)
Very large labor supply
With an effectively infinite supply of labor at current wage, w:
MPA
MPC
MPB
Labor (L)
Output/L
L*
wage
LA
Rent to each land type
Labor (L)
Output/L
L*
wage
RentA
RentB
RentC
Rents accrue to land type Abecause labor is more productive on land type A.
With minimum wage
MPA
MPC
MPB
Labor (L)
Output/L
L*
Old wage
L2
New wage
With minimum wage:1. Employment 2. Rent 3. Type “C” out ofProduction (env.).
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)
Consumptive users in US
Irrigation: 39%Thermo-electric power: 39%Public supply: 12%Industry: 6%Livestock: 1%Home: 1%Mining: 1%Commercial: 1%
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%
Agricultural vs. municipal
Agricultural water heavily subsidizedPrice ~ $20/AF, use 80% water in CaliforniaCost to supply ~ $1000/AF
Municipal waterPrice ~ $300/AF
GroundwaterLargely unregulated, “open access” resource, few property rights, difficult to enforce pumping laws
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?
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.
Imperial Valley/San Diego
High profile water transfer proposed from Imperial Valley to San DiegoImperial Valley
Desert, agricultural, poorest county in CAVast water rights
San DiegoOne of richest, largely municipal, high marginal value for water.
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
Efficient allocation
0% 100%0%100%
DU
DA
U:A:
$ (U) $ (A)San Diego willingto pay this for 1st AF
U0
A0
Imp. Valley willingto sell 1st AF for this
$1000
$50
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.
Did they reach agreement?
Different marginal values should lead to large incentives for tradeImperial 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
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 thingIf no deal, slash CA entitlement from 5.2 MAF/yr to 4.4 MAF/yr.Jan 1, entitlement reduced.
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?
“Prior appropriations”
Supply
Urban Supply(S-QA)
Water
Price
QA
PA
PU
DU DADTotal
Q*
P*
Ag users get first dibs, consume QA units of waterat price PA. Urban buys QU
at price PU. PAPU so equi-marginal principle fails.
QU