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 type
With $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?
RentB=600
$/bushel
RentA=1000
RentC=0
Farm A: gains $1000
Farm B: gains $600
Farm C: break even
Oaks: lose
4.00
2.50
2.00
500
900
1150
Bushels
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 land
Think 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:
Output/L
MPA
MPB
MPC
wage
LA
L*
Labor (L)
Rent to each land type
Rents accrue to land type A
because labor is more
productive on land type A.
RentA
Output/L
RentB
RentC
wage
L*
Labor (L)
With minimum wage
Output/L
MPA
MPB
MPC
New wage
Old wage
L2 L*
With minimum wage:
1. Employment 
2. Rent 
3. Type “C” out of
Production (env.).
Labor (L)
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)
California 9,480
% flood % spray % drip
74%
19%
7%
Nebraska 7,450
47%
53%
0%
Texas
56%
43%
1%
6,310
Agricultural vs. municipal
Agricultural water heavily subsidized
Price ~ $20/AF, use 80% water in California
Cost to supply ~ $1000/AF
Municipal water
Price ~ $300/AF
Groundwater
Largely 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 Diego
Imperial Valley
Desert, agricultural, poorest county in CA
Vast water rights
San Diego
One 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
$ (U)
San Diego willing
to pay this for 1st AF
$1000
$ (A)
Imp. Valley willing
to sell 1st AF for this
DA
$50
DU
U0
U: 0%
A: 100% A0
100%
0%
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 trade
Imperial 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 thing
If 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”
Price
Urban Supply
(S-QA)
Ag users get first dibs,
consume QA units of water
at price PA. Urban buys QU
at price PU. PAPU so equimarginal principle fails.
Supply
PU
P*
PA
DU
QU
DA
QA Q*
DTotal
Water