Real People, Real Resources, and Real Choices: The Case for Market Valuation of Water
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abstract
How is one to value water? Indeed, how does anyone value anything? There are three broad categories of answers to these questions. One relies on the notion of an intrinsic value of a good. In other words, there is a definitive value of a particular good, and this value can be determined by some means. Theological speculations on the "just price" of a good and other speculations on "innate values" of various things often fall into this category. A second category of answers is to deny that a particular good is capable of valuation. Human lives, for example, are often classified as being incapable of valuation. A third category of answers depends on observing human behavior, in particular on observing the actual choices real people make with their resources. Markets fall into this third category, and it is my contention that it is markets' connection with real choices, made by real people with real consequences for the people making the choices, that enables markets to value resources, including water, in a fashion that leads to better outcomes than the alternatives. Indeed, I will argue that markets provide the only way to value resources, including water, which enables their use without provoking conflicts among those who compete for their use. The case for markets for water is strong and rests on four claims. First, markets are a low cost means of providing important signals to others about the value of various uses of water. These signals help water flow to the uses where it produces the largest net benefit for water users. Second, markets allow the uses of water to vary with changes in knowledge and demand. Because they provide a dynamic, rather than a static, valuation, markets are adaptable to changed circumstances. Third, markets encourage the production of new knowledge about water-new ways to use water, new ways to conserve water to make it available for other uses, new ways to think about water's uses, and new ways to deliver water. In short, markets encourage investment in meeting human needs. Fourth, markets do not require large-scale agreement among their participants on overall ends, allowing a diversity of individual ends to co-exist peacefully. In short, markets excel at generating positive-sum transactions that benefit all parties, precisely the situation in which all should aspire to be. Part I of this Article examines each of these claims for the appropriateness of market valuation of water. Markets are far from perfect, of course. But, critiques of markets in general, and critiques of water markets in particular, often conflate dissatisfactions with human nature or other features of society with problems in the market. Experts in various disciplines fret that the public does not listen to the experts enough; people who dislike private property on principle dislike the idea of relying on property rights in markets, and people who are unhappy with markets' outcomes insist that markets get resource allocation wrong because of markets' failure to adequately capture some cost or benefit of various outcomes or to consider some value that market critics consider so important that everyone should be required to pay attention to it. In Part II, I examine representative versions of the criticisms of market processes as applied to water markets and show that they are mistaken. Next, I consider the conditions necessary for establishing markets. Markets do not spring forth from the brow of Adam Smith; they require secure property rights and the rule of law to function. I briefly examine these necessary foundations for markets and how they can be applied to water markets. Part III concludes by discussing the role of water markets in the future.
