The Coase theorem and Western U.S. appropriative water rights

Natural Resources Journal

Volumn 45, Issue 1, 2005, Pages 169-200

  Ruml, C Carter ^a,b,c  

^a STANFORD LAW SCHOOL   (United States)

^b PRINCETON UNIVERSITY   (United States)

^c Boehl Stopher and Graves LLP   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

PROPERTY RIGHTS; THEORETICAL STUDY; WATER ECONOMICS; WATER MANAGEMENT;

NORTH AMERICA; UNITED STATES; WESTERN HEMISPHERE; WORLD;

EID: 22544477850     PISSN: 00280739     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (223)

1. See R.H. Coase, The Problem of Social Cost, 3 J.L. & Econ. 15-16 (1960).
2. Id. at 8,19.
3. See id. at 7-8,15-16;
4. Ronald N. Johnson et al., The Definition ofa Surface Water Right and Transferability, 24 J.L. & Econ. 273, 279 (1981).
5. William Goldfarb, Water Law 32 (2d ed. 1988).
6. See also A. Dan Tarlock et al., Water Resource Management 66-70 (5th ed. 2002) (citing Irwin v. Phillips, 5 Cal. 140 (1855));
7. Carol M. Rose, Energy and Efficiency in the Realignment of Common-Law Water Rights, 19 J. Legal Stud. 261, 289 (1990);
8. Terry L. Anderson & P.J. Hill, The Evolution of Property Rights: A Study of the American West, 18 J.L. & Econ. 163, 177-78 (1975);
9. Joseph L. Sax et al., Legal Control of Water Resources Cases and Materials 285 (3d ed. 2000) (citing Robert G. Dunbar, Forging New Rights in Western Waters 61-63 (1983)).
10. For a discussion describing the evolution of prior appropriation systems, see generally id. at 281-86.
11. Note, however, that adoption of the prior appropriation system was not uniform throughout the mid-nineteenth-century West. Specifically, early Latter Day Saint settlements in Utah and "utopian" communities of other European and American settlers adopted forms of communal ownership of surface water resources, becoming in many ways the forerunners of the mutual water companies that are still quite significant in modern Western agricultural water use.
12. See, e.g., id. at 283-84;
13. Tarlock et al., supra, at 70.
14. See Leonard Rice & Michael D. White, Engineering Aspects of Water Law 27-28 (1987);
15. Tarlock et al., supra note 4, at 161-62, 177-80.
16. See generally Sax et al., supra note 4, at 128 (waste);
17. id. at 208 (abandonment and forfeiture);
18. id. at 236 (historical use requirement).
19. See, e.g., id. at 128-41;
20. Tulare Irrigation Dist. v. Lindsay-Strathmore Irrigation Dist., 45 P.2d 972, 997 (Cal. 1935).
21. Tulare Irrigation Dist., 45 P.2d at 997.
22. See generally Tulare Irrigation Dist., 45 P.2d 972.
23. In Tulare, the California Supreme Court found that seepage losses though unlined irrigation ditches as high as 45% were not wasteful, because losses through other local ditches ranged between 40% and 57%. This is striking proof that waste is contextually determined, and that the task, simply, is to not be markedly more wasteful than one's neighbor.
24. Jenkins v. State Dep't of Water Res., 647 P.2d 1256, 1260 (Idaho 1982) (citing Sears v. Berryman, 623 P.2d 455, 459 (Idaho 1981));
25. see also Rice & White supra note 5, at 31.
26. Jenkins, 647 P.2d at 1260-61.
27. Id. at 1260. Five years is the statutory period in Idaho; the applicable time period may differ from state to state. For example, it is ten years in Colorado.
28. See Beaver Park Water, Inc. v. Victor, 649 P.2d 300, 303 (Colo. 1982) (citing Colo. Rev. Stat. § 37-92-402(11));
29. see also Rice & White, supra note 5, at 31.
30. See Jenkins, 647 P.2d at 1261 (on defenses to forfeiture);
31. see also id. (on resumption of use as a defense to forfeiture).
32. Santa Fe Trail Ranches Prop. Owners Ass'n v. Simpson, 990 P.2d 46, 54 (Colo. 1999).
33. Id. Under Colorado law, for example, the applicant has the evidentiary burden of showing that the volume of the proposed transfer does not exceed their historical beneficial use.
34. Ibid. Id.
35. Id. at 57.
36. Goldfarb, supra note 4, at 32;
37. Johnson, supra note 3, at 282.
38. Sax et al., supra note 4, at 104-05.
39. Ibid. Id..
40. See, for example, State ex rel. Martinez v. McDermett, 901 P.2d 745 (N.M. Ct. App. 1995), where the court reversed the assignment of a 1907 priority to an entire 84-acre plot, because only 20 acres of the land had been irrigated in the early period of the century, but the rest of the land had not begun to be farmed until 1947.
41. Sax et al., supra note 4, at 104.
42. See discussion infra Part III.
43. Charles F. Wilkinson, Crossing the Next Meridian: Land, Water, and the Future of the West 236-37 (1992) (citing Wallace Stegner, Beyond the Hundredth Meridian: John Wesley Powell and the Second Opening of the West, Commenting on the early explorer's perception of the West's aridity and unsuitability for agriculture);
44. see also Tarlock et al., supra note 4, at 22, fig. 3;
45. Sax et al., supra note 4, at 4-5;
46. Rice & White supra note 5, at 5;
47. Barton H. Thompson, Jr., Markets for Nature, 25 Wm. & Mary Envtl. L. & Pol'y Rev. 261, 267-68 (2000). In the most recent half decade, a severe drought has prevailed in the West, and water is even more scarce than usual.
48. See Kirk Johnson & Dean E. Murphy, Drought Settles In, Lake Shrinks and West's Worries Grow, N.Y. Times, May 2, 2004, at A1 (quoting U.S. Geological Survey reports that, for the Colorado River, the period since 1999 is the driest in the 98 years for which records are available).
49. Thompson, supra note 23, at 268.
50. Goldfarb, supra note 4, at 33. Note the contrast with the riparian system of water rights prevalent in the Eastern United States, under which each user is allowed a reasonable amount of water, but under which each user is subject to roughly pro-rata cutbacks in times of shortage.
51. See, e.g., Tarlock et al., supra note 4, at 122-23;
52. Dean Lueck, The Rule of First Possession and the Design of the Law, 38 J.L. & Econ. 393, 427 (1995);
53. Rose, supra note 4, at 292.
54. Sax et al., supra note 4, at 108.
55. Ibid. Id.
56. Id. (i.e., another appropriator challenging the amount of water sought by the would-be appropriator).
57. Id. at 108-09.
58. Id. at 108.
59. See, e.g., Lawrence Berger, An Analysis of the Doctrine That "First in Time Is First in Right," 64 Neb. L. Rev. 349, 372-73 (1985).
60. Sax et al., supra note 4, at 228.
61. Id. at 299.
62. See, e.g., Johnson, supra note 3, at 284 (discussing the New Mexico transfer process and that state's publicity requirements);
63. Sax et al., supra note 4, at 229.
64. Ibid. Id.
65. Ibid. Id.
66. Barton H. Thompson, Jr., Institutional Perspectives on Water Policy and Markets, 81 Cal. L. Rev. 671, 704 (1993).
67. Johnson, supra note 3, at 273;
68. see also Rice & White, supra note 5, at 147-51 (discussing and providing a schematic of the complexities of characterizing return flows).
69. See, e.g., Thompson, supra note 37, at 704;
70. Sax et al., supra note 4, at 230. An example of a return flow situation would be if there is an upstream appropriator who diverts 10 cubic feet per second (cfs) to irrigate their field, with 5 cfs of this diversion flowing back into the river, where it is then diverted again by an appropriator situated immediately downstream. If the upstream appropriator plans to fallow half their acreage and transfer half of their water right to an out-of-basin user such as a city, then if the same diversion-return flow ratio applies, after the transfer only 2.5 cfs of return flow would be available to the downstream appropriator. The downstream appropriator could protest and block this hypothetical transfer, which could be approved subject to the condition that all of the land is fallowed, and 5 cfs is transferred out-of-basin, which will leave the necessary 5 cfs of flow available to the downstream appropriator. For an analysis of problems caused by defining water rights in diversion rather than consumption terms, see Johnson, supra note 3, at 279.
71. Thompson, supra note 37, at 704;
72. Sax et al., supra note 4, at 230;
73. Rice & White, supra note 5, at 156-57.
74. Sax et al., supra note 4, at 229.
75. See generally Thompson, supra note 37.
76. Id. at 705.
77. Ibid. Id.
78. Id. at 704-05;
79. see also Anthony Scott & Georgina Coustalin, The Evolution of Water Rights, 35 Nat. Resources J. 821, 973 (1995) (commenting generally on the expense of the transfer process).
80. See supra note 37 and related discussion.
81. Lawrence J. MacDonnell, The Water Transfer Process as a Management Option for Meeting Changing Water Demands 47-48 (1990).
82. See, e.g., Thompson, supra note 37, at 707 (noting that "the sheer hydrologic uncertainty involved in determining whether a transfer will affect downstream appropriators will inevitably produce sizeable administrative costs").
83. Id. at 705.
84. Ibid. Id.
85. See Stephen J. Choi, Do the Merits Matter Less in Securities Class Actions? (Mar. 2004) (unpublished manuscript presented to the Stanford Law School Spring 2004 Law & Economics Seminar), available at http://ssrn.com/abstract=558285 (last visited Feb. 27, 2005),
86. Robert D. Cooter & Daniel L. Rubinfeld, Economic Analysis of Legal Disputes and Their Resolution, 27 J. Econ. Literature 1067 (1989), as examples of the law and economics literature discussing how increased dispute resolution and/or litigation costs decrease the volume of claims that will be brought before administrative agencies and/or courts for resolution.
87. Santa Fe Trail Ranches Prop. Owners Ass'n v. Simpson, 990 P.2d 46,55 (Colo. 1999) (quoting Chatfield E. Well Co. v. Chatfield E. Prop. Owners Ass'n, 956 P.2d 1260, 1270 (Colo. 1998)).
88. Rice & White supra note 5, at 74.
89. Sax et al., supra note 4, at 268-70 (commenting on Wyoming as a case study of the frequent discrepancies between state water rights records and real-world patterns of water use).
90. Sax et al., supra note 4, at 236.
91. Thompson, supra note 37, at 705.
92. See supra note 37 and related discussion.
93. See supra Part II.B.3 (regarding the historical use requirement).
94. Sax et al., supra note 4, at 229 (noting that statutory transfer proceedings can cost up to $50,000).
95. Sax et al., supra note 4, at 229;
96. see also Steven N.S. Cheung, The Structure of a Contract and the Theory of a Non-Exclusive Resource, 13 J.L. & Econ. 49, 67 (1970). Evaluating his analysis of the economics of a fishery, Cheung commented that "transfer of property rights among individual owners through contracting in the marketplace requires that the rights be exclusive... without some enforced or policed exclusivity to a right of action, the right to contract so as to exchange is absent."
97. Id. at 67. Cheung went on to observe that the "absence of exclusivity in property may be due to the absence of recognition by legal institutions of that exclusivity."
98. Id. Cheung would surely have considered his comments applicable to transfers in the prior appropriation system. The doctrines of waste, forfeiture, abandonment, and the historical use requirement all combine to partially (but not fully) and unpredictably undercut the exclusivity of water rights, in that what an appropriator believes is theirs to transfer may not actually be theirs, if aspects of their appropriative right are successfully challenged during the transfer application process. The failure of exclusivity in water rights is partial rather than total, which may be why transfers are only partially (but not completely) blocked.
99. See Johnson et al., supra note 3, at 288. Johnson et al. focused their analysis on New Mexico transfers and downplayed the significance of "obstacles to the efficient transfer of water," instead emphasizing that "[i]t is not the appropriative system that is at fault but rather the manner in which rights are defined within that concept."
100. Id. As a partial solution, Johnson et al. urged that water rights be defined with respect to consumption rather than diversion.
101. Id. In other words, of the two Coase Conditions that fail in the prior appropriation system at large, it is insecurity of property rights rather than high transaction costs that is the more important variable in the failure to reach Coase Equilibrium.
102. See Scott & Coustalin, supra note 45, at 964 (discussing lack of exclusivity as the reason for insufficient definition of appropriative water rights).
103. See Tulare Irrigation Dist. v. Lindsay-Strathmore Irrigation Dist., 45 P.2d 972, 1010 (Cal. 1935).
104. See, e.g., Sax et al., supra note 4, at 229.
105. This would violate the historical use requirement. See discussion Part II.B.3, supra.
106. See, e.g., Santa Fe Trail Ranches Prop. Owners Ass'n v. Simpson, 990 P.2d 46 (Colo. 1999).
107. See, e.g., State ex rel. Martinez v. McDermett, 901 P.2d 745, 750-51 (N.M. Ct. App. 1995).
108. See Sax et al., supra note 4, at 236, for a good discussion of a hypothetical transfer problem integrating the several anti-transfer incentives discussed above.
109. See discussion Part III.C.2, supra.
110. See Rodney T. Smith, Water Transfers, Irrigation Districts, and the Compensation Problem, 8 J. Pol'y Analysis & Mgmt. 446, 447 (1989).
111. Note, however, that, even in Utah, the state with the greatest number of statutory transfers, only one to two percent of the water supply changed hands each year.
112. See Sax et al., supra note 4, at 226 (citing MacDonnell, supra note 47);
113. see also Thompson, supra note 37, at 703-08 and accompanying footnotes.
114. Robert C. Ellickson, Of Coase and Cattle: Dispute Resolution Among Neighbors in Shasta County, 38 Stan. L. Rev. 623, 628 (1986).
115. Id. at 686.
116. Ibid. Id.
117. Id. at 672-73 (community norms), 676-77 (self-help and relational sanctions, particularly gossip), 680-81 (aversion to litigation).
118. Note, however, that Ellickson called into question whether the purely "legal" rules of trespass were very relevant to the outcomes he observed. See id. at 685-86. There were clear alternatives to legal rules, however, in the form of deep-seated local trespass norms.
119. Id. at 686. Consequently, the "right thing to do" (a substitute for who, precisely, owns what) was usually clear to Shasta County residents. This permitted the second Coase Condition to hold.
120. Cheung, supra note 60, at 68 (cautioning that, "without transfer, the highest-valued option may not be realized");
121. see also Berger, supra note 31, at 373.
122. Cf. Coase, supra note 1, at 19 (suggesting a theoretical possibility of the existence of a perfect initial allocation in which no value-enhancing transfers are necessary, and in which the absence of transfers would not be proof of deadweight losses).
123. But see L.M. Hartman & Don Seastone, Water Transfers: Economic Efficiency and Alternative Institutions 13 (1970) (remarking that "present [statutory] transfer procedures do not lead to an efficient allocation of water resources except fortuitously").
124. See discussion Part IV, infra.
125. Jim Carlton, Is Water Too Cheap? As Contract Renewals Loom, Environmentalists, Tax Group Call for Farmers to Pay More, Wall St. J., Mar. 17, 2004, at B1.
126. See, e.g., Thompson, supra note 37, at 701-02.
127. See, e.g., Carlton, supra note 79 (noting that San Jose, California, pays $80/acre foot for its municipal water, but that farmers using water provided by the Bureau of Reclamation's Central Valley Project pay only $10/acre foot).
128. See, e.g., Smith, supra note 69, at 446-47;
129. Thompson, supra note 37, at 676, 701-02;
130. Sax et al., supra note 4, at 224-25 (noting that reducing Arizona agricultural water use by five percent could permit a population increase of 1.5 million, or 50 percent of the state's 1985 population, and that reducing irrigation-related consumptive use in Colorado by five percent would nearly double the amount of water available for municipal and industrial uses);
131. Dunbar, supra note 4, at 211-17;
132. Lawrence J. MacDonnell, Transferring Water Uses in the West, 43 Okla, L. Rev. 119 (1990);
133. Tarlock et al., supra note 4, at 225;
134. Wilkinson, supra note 23, at 285;
135. Charles W. Howe et al., The Performance of Appropriative Water Rights Systems in the Western United States During Drought, 29 Nat. Resources. J. 379, 385 (1982);
136. Zach Willey & Tom Graff, Federal Water Policy in the United States - An Agenda for Economic and Environmental Reform, 13 Colum. J. Envtl. L. 325, 328 (1988) (indicating that year 2000 consumptive uses of fresh water in the United States were projected to be 95.1 billion gallons per day (bgd) in the agricultural sector, but only 24.2 bgd in the commercial, manufacturing, and domestic sectors combined, meaning, for instance, that a five percent reduction in the amount of agricultural consumption would permit a 19.6% increase in the amount of water available for "urban" needs).
137. Lueck, supra note 25, at 429. Lueck correctly noted (i) that the return flow from each diversion is a public good; (ii) that transferors will impose externalities on other appropriators if a transferor is allowed to transfer more than the fraction of their appropriation that is consumptively used; and (iii) that when water rights are "defined only over diversion, the stream value will not be maximized through unrestricted trading if return flows differ among users."
138. " Id. at 429-30 (citing Johnson, supra note 3). The public good nature of return flows is probably the economic rationale underlying the "no-harm" requirement imposed on transfers, as well as the justification for placing the burden of proving "no-harm" on the applicant-appropriator, ensuring that they do not appropriate the public good to themselves.
139. See, e.g., Howe, supra note 82, at 379 (citing Hartman, supra note 77);
140. see also Part III, supra.
141. Thompson, supra note 37, at 686.
142. Id. at 687.
143. Ibid. Id.
144. Id.; cf.
145. Olivia S. Choe, Note, Appurtenancy Reconceptualized: Managing Water in an Era of Scarcity, 113 Yale L.J. 1909, 1943-49 (2004) (discussing "nested enterprises" in the Eastern United States in comparison to the "umbrella model" of water institutions in the Western United States.).
146. Thompson, supra note 37, at 695;
147. see also Howe, supra note 82, at 386 (describing an arrangement in Colorado under which the Federal Bureau of Reclamation sells water from its Colorado-Big Thompson project to the Northern Colorado Water Conservancy District and District members can sell water entitlements within the District's service area without resort to statutory transfer processes).
148. Thompson, supra note 37, at 695.
149. Ibid. Id.
150. Id. at 710.
151. Ibid. Id.
152. Id. at 710-13.
153. See discussion supra Part III.
154. Thompson, supra note 37, at 713-14 (noting that "small-scale studies suggest that institutional transfers far outnumber the few statutory transfers that occur each year in the average state").
155. California, for example, has 230 public water districts. Id.
156. Id. (citing studies tallying over 1000 transfers, totaling over 16,000 acre-feet, in just six Colorado water districts, and between 290 and 629 transfers each season between four Utah districts)
157. Ibid. Id.
158. Id. at 714 (noting studies indicating that annual statutory transfers totaled one percent of New Mexico water rights and 1.5% of Utah water rights, but that annual institutional transfers totaled 5.6% of Colorado districts' supplies, 29% of Utah districts' supplies, and 7.6% of the supply available to California's Arvin-Edison Water Storage District).
159. Id. at 696.
160. Ibid. Id.
161. Id. at 710 (noting the "search" and "pricing" cost reductions enabled by uniform intra-district allotments and the "clearinghouse" activities of districts).
162. See, e.g., Walter Nicholson, Microeconomic Theory: Basic Principles and Extensions 513-14 (7th ed. 1998).
163. Thompson, supra note 37, at 712.
164. Ibid. Id.
165. Id. at 713.
166. Ibid. Id.
167. See supra note 71 and related discussion.
168. See, e.g., Charles L. Knapp et al., Problems in Contract Law: Cases and Materials 255 (4th ed. 1999) (citing Stewart Macaulay, Non-Contractual Relations in Business: A Preliminary Study, 28 Am. Soc. Rev. 55 (1963);
169. David Charny, Nonlegal Sanctions in Commercial Relationships, 104 Harv. L. Rev. 373 (1990)).
170. See supra note 97 and accompanying discussion (showing a large quantity of cooperative transfers rather than confrontational litigation).
171. Note that the "clearinghouse" role of water institutions permits them to come much closer to matching willing sellers and willing buyers at a single equilibrium price than would be possible in a statutory transfer alternative, where private-party deals might happen at a range of prices, and some would-be water users might not succeed in making their consumer preferences known.
172. Robert D. Cooter & Daniel L. Rubinfeld, Economic Analysis of Legal Disputes and Their Resolution, 27 J. Econ. Literature 1067 (1989).
173. Id. at 1089.
174. Ibid. Id.
175. See supra notes 34,107, and accompanying discussion.
176. See supra note 37 and accompanying discussion.
177. See supra note 35 and accompanying discussion.
178. This may not be the case with larger transfers, which tend to relate to larger tracts of land. In such a case, it may be more expensive to characterize and quantify return flows.
179. If the challenge succeeds and the transferor loses their entire appropriative right, as in State ex rel. Martinez v. McDertmett, 901 P.2d 745 (N.M. Ct. App. 1995), and if the challenger is the first "paper right" in line to benefit from the "new" water lost by the transferor, the payoff is direct. If the challenge succeeds and the transfer is reduced in scope to ensure that more return flows will be available to other appropriators, the payoff is indirect.
180. See discussion supra Part V.C.
181. For example, transfers in the context of irrigation districts, mutual water companies, and other similar water institutions.
182. Howe, supra note 82, at 388;
183. see also Sax et al., supra note 4, at 316 (discussing constitutional protection for existing water rights under the Fifth Amendment's takings clause);
184. Franco-American Charolaise Ltd. v. Okla. Water Res. Bd., 855 P.2d 568, 577 (Okla. 1990);
185. Hage v. United States, 35 Fed. Cl. 147, 172 (1996) ("[W]ater rights are not 'lesser' or 'diminished' property rights unprotected by the Fifth Amendment. Water rights, like other property rights, are entitled to the full protection of the Constitution.").
186. But see Sax et al., supra note 4, at 333 (noting that the courts have been "very deferential to governmental water regulation," notwithstanding frequent takings challenges by appropriators affected by the regulations). On how weakening the security of appropriative rights might harm development of emerging water markets,
187. see Barton H. Thompson, Jr., Takings and Water Rights, in Water Law: Trends, Policies, and Practice 43, 43-44 (Kathleen Carr & James Crammond eds., 1995) (cited in Sax et al., supra note 4, at 334).
188. See, e.g., Scott & Coustalin, supra note 45, at 971-76 (envisioning the future role of a hypothetical larger water institution they call a "river corporation"). Scott and Coustalin's primary focus for the "river corporation" was on governance and regulation of the riparian resource, but a secondary focus included the facilitation of transfers among a wider range of appropriators on a river.
189. Id. at 973-74. They noted that the "river corporation" was an "institutional innovation" of current irrigation districts and other water institutions.
190. Id. at 972.
191. Sax et al., supra note 4, at 150.
192. Ibid. Id.
193. Ibid. Id.
194. See Scott & Coustalin, supra note 45, at 974 (noting that the "river corporation" could, among other roles, act as a clearinghouse for short-term transfers).
195. In comparison, transferee "paper rights" holders (such as SDCWA) would be proponents, rather than challengers, of the transfers because they are parties to the transfers.
196. See discussion supra Part V.
197. Ellickson, supra note 71, at 624.
198. see Oliver E. Williamson, The Mechanisms of Governance 151-52 (1996), for a discussion, rooted in transaction cost economics, of reputation effect mechanisms that dramatically increase possibilities for trust and cooperation when commercial interactions become repeat games rather than isolated, "one-shot" events.
199. See also Scott & Coustalin, supra note 45, at 973-74 (discussing how the "river corporation" could both avoid and mediate transfer-related disputes, thereby increasing comity among appropriators on the river).
200. See, e.g., Sax, supra note 4, at 150 (discussing the MWDSC-IID controversy cited above at note 124).
201. Thompson, supra note 37, at 732;
202. Richard L. Bowen et al., Rent Seeking, Wealth Transfers and Water Rights: The Hawaii Case, 31 Nat. Resources. J. 429, 432, 445-46 (1991) (discussing rent-seeking issues arising in Hawaii water transfers and political wrangling between landowners, urban residents, real estate developers, and public interest groups over the financial windfall from hypothetical ag-urban trades between sugar producers and growing urban areas);
203. see also Stewart E. Sterk, Neighbors in American Land Law, 87 Colum. L. Rev. 55, 72-73 (1987) (commenting that "transaction costs frequently do impede efficient bargains" and that "instances in which strategic bargaining does inhibit efficient results are legion"). For a discussion of why internal organization (by analogy, possibly, a water institution) is superior to "market modes of contracting" (by analogy, possibly, the statutory transfer process) "in circumstances where opportunism and small-numbers conditions are joined,"
204. see Oliver E. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications 26-29 (1975). There is an opportunism problem in the prior appropriation system as a whole because there are small-numbers conditions: empirically there is not a "rivalry among large numbers of bidders" to buy or sell water that will "render opportunistic inclinations ineffectual."
205. Id. Williamson notes "transactional dilemmas" associated with the opportunism facilitated by small-numbers conditions such as increased bargaining costs and indirect costs (presumably, such as litigation).
206. Id. Williamson's insights certainly apply to the prior appropriation system and are another way of describing failure of the Coase Conditions: when opportunism is unconstrained, transaction costs will rise and property rights will become less secure. In contrast, within water districts, there is a much more competitive market to buy and sell water, which reduces the small-numbers problem and constrains opportunism.
207. See generally Smith, supra note 69.
208. Ibid. Id.
209. Ibid. Id.
210. Ibid. Id.
211. Ibid. Id.
212. Ibid. Id.
213. See, e.g., Bowen et al., supra note 133, at 447. Bowen et al. discuss an "auction solution" to the rent-seeking problems of hypothetical ag-urban trades in Hawaii, in which the state government would auction water rights to the highest bidders. The efficiency in allocation would be similar to that achieved by the tender offer model, but under Bowens proposal, the rents would accrue to the state rather than to private appropriators as proposed by Smith. Both the auction and the tender offer would facilitate fulfillment of the Coase Conditions by lowering transaction costs and more clearly delineating property rights. The different financial impacts on the public and private sectors under each proposal provide a clear demonstration of how initial resource allocations determine revenue flows but not patterns of resource utilization when systems are at Coase Equilibrium;
214. see also Sterk, supra note 133, at 73 (implying that efficien bargains are more likely to be made in competitive markets than in bilateral-monopoly situations in which transaction costs are higher).
215. See, e.g., Sax. et al., supra note 4, at 196, 246. Criticism of third-party effects of water transfers may be misplaced. Ag-urban trades are symptomatic of larger structural changes in the Western U.S. economy, as water resources become more highly valued in urban and industrial uses than in agricultural ones. Other U.S. economic sectors such as manufacturing have undergone profound structural changes in recent decades, often at very high costs to communities, workers, and other third parties. Nonetheless, there has not been a strong effort to prevent these changes; it may make little economic sense to take a different course with Western water.
216. See id. at 248-49;
217. Thompson, supra note 37, at 734. Nonetheless, as long as the same efficiencies can be achieved, from a social welfare standpoint it is desirable to minimize dislocations.
218. See Thompson, supra note 37, at 733-35.
219. In contrast recent "ag-urban" transfers such as the IID-SDCWA transaction left junior appropriators such as MWDSC "out in the cold," with large incentives to sue.
220. See, e.g., Howe, supra note 82, at 388 (calling for establishment of a "state or interstate agency" much like the District proposed in this Article that would "make a market" in water rights by providing pricing information, brokering transfers, and making whole third parties - presumably other appropriators - whose interests were harmed by transfers).
221. See discussion supra Part V.
222. One foreseeable issue with increasing the freedom with which water now used within irrigation districts can be marketed to cities (who will pay a higher price for it) is that many current transferee farmers within the irrigation districts wish to maintain artificially low prices for water by keeping demand for the water limited to in-district uses. Hopefully, the tender offer model will reduce this problem, because all farmers (even those who now use institutional markets to buy water that is cheaper than its real value on an open market) would stand to benefit from selling water through the District to urban transferees.
223. See, e.g., Thompson, supra note 37, at 736-37.