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Published on January 4, 2008

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Water for Western Cities I Chinatown: Owens Valley and Los Angeles--The Bargaining Costs of the First Major Water Rights Exchange Water for Western Cities II “Refilling Mono Lake“ Judicial and Administrative Reallocation of Los Angeles’ Water:  Water for Western Cities I Chinatown: Owens Valley and Los Angeles--The Bargaining Costs of the First Major Water Rights Exchange Water for Western Cities II “Refilling Mono Lake“ Judicial and Administrative Reallocation of Los Angeles’ Water Gary D. Libecap UCSB NBER Hoover Institution Outline of the Presentation:  Outline of the Presentation Western cities and water. The Owens Valley transfer and Mono Basin Pure water, gravity flow, power generation 34,000,000 acre feet > Lake Mead Complicated bargaining problem. Land market to acquire water. Heterogeneous properties, Incomplete information. Bi-lateral monopoly Los Angeles Water Board (LADWP). Farmers (competitive fringe and collusive organizations) Econometric Results Assessment of the Impact for long term security of water rights. Outline of the Presentation:  Outline of the Presentation What happened to those water rights? Follow the status of Los Angeles’ water rights over the 20th century New environmental and recreational demands for water: Option for market exchange based on the property rights acquired. Use judicial/administrative reallocation instead. Costly, Delay, Relevant information not generated Considerable misallocation of water and other resources Uncertainty for all water rights and raises costs of reallocating water today. Creates a regulated commons. Move opposite from other resources. Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer Western cities require access to water from elsewhere. Owens Valley—first and one of the largest private water transfers. 1905-35. Made Los Angeles possible. Complicated bargaining setting. 1,167 farms, 262,102 acres purchased for $20,768,233 ($219,727,905 in 2003$). Negotiations for some farms were contentious, taking 5-10 years, others were fast. Press and politicians involved. Part of the popular media on water. “Water theft” Interesting bargaining problem. Legacy for subsequent water rights. Data set: LADWP archives. Data set on 869 properties. Explain the time of sale, price paid, distribution of the gains from trade, and identify the farms involved in the most contentious bargaining. Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer Physical setting: 120 x 6 miles; 7,000 people, 140,000 acres of farm land. Marginal. Small farms. Low per farm production. Los Angeles sought the water rights. Had to purchase the farms. Offers based on estimated value of agricultural productivity; farmers wanted prices based on Los Angeles values. Limited information about both. 1905-1922—southern Owens Valley, non controversial purchases. 1922-34—northern Owens Valley, controversial. Bi-lateral monopoly. Board gradually purchased more land to maintain a flow/capita in the aqueduct. Gradual supply constraint. Efficiency implications of the bargaining setting. Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer Bargaining parties. Bi-lateral monopoly. Water Board. Subject to political oversight Objective to maintain flow of water/capita Offers based on agricultural values. Appraisal board. Pricing rule. If followed would capture surplus of re-allocating water. Collusive Farmers. Collusive efforts. 1922-25. Owens Valley Irrigation District. ¾ of all OV water. Only farmers with the most water. Positive externalities from early sale; negative externalities if members of a collusive group. 3 Sellers’ pools. Competitive Fringe. Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer Quantitative analysis. 595 observations of farms 10+ acres. P = f (farm size, farm size2, cultivated acreage, cultivated acreage2, water/acre, water/acre2, riparian water rights, year of sale, pool membership, non-pool ditch farms, cumulative percent of total water purchased as of each year ) Year = g (farm size, farm size2, cultivated acreage, cultivated acreage2 , water/acre, water/acre2, riparian water rights, pool membership, non-pool ditch farms, population, and aqueduct flow per capita). Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer Water market. Price of acre foot of water = (same variables as in land market since land market used to secure water). 2SLS Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer Owens Valley Farm Property Characteristics, Mean Values Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer Year of Purchase LAND Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer DV = price per acre LAND Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer Year of purchase results: Keough pool delays 1 year. Weaker pools not different from baseline. Early defecting farms sell about .5 year earlier. Additional acre foot of water/acre speeds sale by .26 year. 10,000 additional people in LA speed sale by 1 year. Aqueduct flow affects timing of sales. Highest flow has sales about 2 years later than lowest flow. Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer Land market results: An additional year of delay increases price by $35/acre. Additional water AF/acre increases price by $43. Contribution at a declining rate. VMP of water = 0 at 17AF/acre. Keough pool adds $185/acre Watterson and Cashbaugh earn $82 and $57. Early defectors earn $81/acre, about what was possible through the weakest pools. 1% increase in the cumulative water purchased as of each year raises per acre price by $1.46/acre. Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer DV = Year of Purchase WATER Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer DV = price per acre foot of water WATER Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer Water market results. LA population, decline in aqueduct flow, and farm size speed sale. Non pool ditch defectors sell about half a year earlier. Pool membership has no effect. An additional water AF/acre reduces price by $357/AF. Explains resistance by farmers with the most water to accept land prices based on agricultural values. Their collusive organizations brought higher land prices but not high enough to capture more of the surplus. Another measure of LA market power: Willingness to pay for Colorado River water. 1931 contract. Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer Owens Valley to Los Angeles Water Transfer:  Owens Valley to Los Angeles Water Transfer Assessment: The total expenditures for Owens Valley farms between 1916 and 1934 by the Water Board: $13,937,934, 266,428 acre feet of water secured for a mean price of $52.31. If LA had paid $220 per acre foot total expenditures would have been $58,614,375, over 4 times the actual. Although farmers do well in the land market, prices per acre rise to $143 between 1910 and 1930, compared to 4 other Great Basin counties of $45/acre. Do not do as well in the water market. Source of the notion of “water theft.” The farms with the most water and the ones involved in collusive efforts and contentious bargaining were the most affected. Legacy of the battle over rents that implies theft and lack of legitimacy—long term effects. Los Angeles’ Water Rights, 1930-2006:  Los Angeles’ Water Rights, 1930-2006 1930-40, Los Angeles acquires all farm land in Owens Valley (Inyo County) as well as riparian water rights in Mono Basin to the north. Consolidates holdings and leases properties. Agricultural water is residual. Internalizes most externalities More than sufficient water to fill the aqueduct. Invests in site-specific, non-deployable infrastructure. 1970 a second aqueduct. Diverts more water to aqueduct. Mono Lake’s level drops. Small tributary streams dry. Environmental and sports groups sue. Could have purchased the water. Judicial and Administrative Re-allocation of Water :  Judicial and Administrative Re-allocation of Water 1972 suit filed, beginning of 34 years of legal battles over Owens Valley and Mono Basin Water Legal challenges based on the Public Trust Doctrine, Fish and Game Regulations, Clean Air Act. National Audubon Society v. Superior Court 33 Cal 3d 419, 1983 Public Trust Water Rights are use rights only, can be re-allocated without compensation whenever the courts decide that the use is inconsistent with the public trust. “…the continuing power of the state as administrator of the public trust, a power which extends to the revocation of previously granted rights or to the enforcement of the trust against lands long thought free of the trust”(33 Cal. Ed 440). Judicial and Administrative Re-allocation of Water:  Judicial and Administrative Re-allocation of Water Vague, uncertain. Energized expansion of the public trust doctrine into other areas and states. Series of subsequent cases. 1994, virtually all water diversions halted for 20 years to allow Mono Lake’s level to rise to a target level, rejuvenate stream fisheries. Cost: 2005 40 % of historical aqueduct flow devoted to environmental and recreational uses. 166,000 acre feet annually or $83,166,000/ year, PV = $1,427,052,576. Does not include litigation costs or stranded capital costs. Judicial and Administrative Re-allocation of Water:  Judicial and Administrative Re-allocation of Water Non optimal allocation. No equating of marginal values. Generates information on willingness to buy and sell. Information generated was done via an adversarial process whereby the experts bolstered case. Not voluntary. Zero sum game. Makes property rights insecure. Reduce incentives to invest in conservation, allocation, and infrastructure, habitat. Public Trust doctrine creates a commons where one did not exist before. Regulated use. Opposite for other resources. Historical legacy of Los Angeles’ initial acquisition of water rights in Owens Valley.

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