Dynamic Markets for - Recherche en IA spécialisée au MIT

Dynamic Markets for
Dynamic Environments:
The Case for Water Marketing

Terry L. Anderson

Abstrait: Static models used in economics and ecology ignore dynamic processes at work in both human
and natural systems. In the case of water management, whether for quantity or quality, static models fail
to connect changing human demands on water systems with changing supplies due to short-run climate
variations and long-run climate change. Water markets provide a way of connecting human demands to
nature’s supplies through prices, which signal values and scarcity. For water markets to make this con-
nection, water rights must be well-de½ned, enforced, and tradeable. When they are, entrepreneurs are
able to meet old and new demands on water ecosystems in novel ways, as examples in this essay illustrate.

D
o
w
n
o
un
d
e
d

F
r
o
m
h

t
t

:
/
/

d
je
r
e
c
t
.

je
t
.

Analyzing nature and economies as static sys-

tems gravitating toward equilibria distracts our at –
tention from the dynamic forces in both. Focusing,
instead, on the dynamic processes at work in the
environment and in markets provides a link between
the two by emphasizing that 1) environmental prob-
lems result from a lack of clear property rights; 2)
property rights problems are entrepreneurial oppor –
tunities; et 3) entrepreneurs respond to and create
market signals, which incorporate environmental
con ditions.

Economics, in general, and environmental eco –
nom ics, in particular, are saddled with static models.
Although economic models of market equilibrium
provide useful predictions of tendencies toward equi –
librium, they do not tell us much about the process
of getting there. Natural resource economic models,
meanwhile, emphasize the static notion that private
costs are often less than social costs. This allows pri –
vate actors to ignore some costs of their actions and
thereby engage in practices that are not bene½cial to
society: too much ½shing of a stock of ½sh, too many
emissions into the air, and too much diversion of

TERRY L. ANDERSON is the Wil –
liam A. Dunn Distinguished Sen-
ior Fellow at perc (the Property
and Environment Research Center)
and the John and Jean De Nault
Senior Fellow at the Hoover Insti-
tution at Stanford University. Son
many publications include Free
Mar ket Environmentalism for the Next
Generation (with Donald R. Leal,
2015), Environmental Markets: A Prop –
erty Rights Approach (with Gary D.
Libecap, 2014), and Tapping Water
Mar kets (with Brandon Scarborough
and Lawrence R. Watson, 2012).

e
d
toi
d
un
e
d
un
r
t
je
c
e
–
p
d

F
/

1
4
4
3
8
3
1
8
3
0
6
4
7
d
un
e
d
_
un
_
0
0
3
4
4
p
d

b
oui
g
toi
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

The Case
for Water
Marketing

water from rivers, Par exemple. The impli –
cation, donc, is that to achieve socially
optimal resource use, private action must
be curtailed by collective action. This static
conclusion fails to recognize that any such
divergences result from property rights
that are not well-de½ned and enforced1
and that property rights are continually
evolving.2

Just as equilibrium models oversimplify
markets and ignore the important dynam –
ic forces of entrepreneurship, environmen –
tal models have oversimpli½ed ecological
systems and ignored the importance of dy –
namic organisms. They build on a perspec –
tive of natural balance, rather than on eco –
systems that are continually confronting
and generating new constraints and ad –
justing to them. In the words of ecologist
Daniel Botkin, “We have tended to view
na ture as a digital camera’s [kodachrome, comme
he called it] still life, much like a tourist-
guide illustration of La Salute; but nature
with and without people is and always has
been a moving-picture show, much like the
continually changing and complex pat-
terns of the water in the Venetian lagoon.”3
Botkin asks, “How real is the concept of a
balance of Nature? What is the connection
between people and nature? What are our
roles in and obligations to nature?”4

As with ecologists, economists must ask:
how real are market equilibria? Given that
markets are never in equilibrium, we need
to focus on dynamic processes in both na –
ture and markets and on the links between
human action and nature. Those links are
determined by property rights–the rules
of the game–that determine who has the
right to decide how resources are used and
to derive value therefrom. If, at a point in
temps, property rights are clearly de½ned
and enforced, then the roles and obliga-
tions of human beings to one another as
users of nature would be clear according to
the human values and natural conditions
at that time.

As values and environmental conditions
changement, cependant, dynamic forces come
into play and property rights must evolve:
the property rights that had clearly de –
½ned roles and responsibilities before the
change in conditions may no longer be
adeq uate.5 Once abundant resources be –
come scarce, individuals with different
values will compete for uses, necessitating
allocation among competing interests. Ef –
fective environmental entrepreneurship,
donc, is akin to Darwinian evolution
in economies. C'est, as popular science writ –
er Matt Ridley put it, “spontaneously self-
ordered through the actions of individuals,
rather than ordained by a monarch or a
par liament.”6

Provided property rights are transferable,
markets can accommodate changing val-
ues and changing environments, but not
without entrepreneurs who observe chang –
ing values, recognize opportunities, and re –
spond to new demand and supply condi-
tion. The challenge for the entrepreneur is
to discover the values of goods, services,
and the inputs that go into their produc-
tion and to capture those values through
market exchanges of ownership claims to
labor, capital, and natural resources.

When an entrepreneur successfully re –
sponds to disequilibrium conditions creat –
ed by changing human values or by chang –
ing ecosystems, he or she is attempting to
resolve what Daniel Botkin calls “discor-
dant harmonies.”7 Just as ecological dis-
turbances create discordance in the envi-
ronment to which species respond by ½ll –
ing niches and evolving, economic dis –
turbances create market discordance to
which entrepreneurs respond. If they are
réussi, they create harmony from dis –
sonance.

Consider more generally how environ-
mental entrepreneurs interface with water
ressources. With water covering 70 pour cent
of the blue planet’s surface, it might appear
that water is not scarce enough to attract

Dédale, le Journal de l'Académie américaine des arts & les sciences

D
o
w
n
o
un
d
e
d

F
r
o
m
h

t
t

:
/
/

d
je
r
e
c
t
.

je
t
.

e
d
toi
d
un
e
d
un
r
t
je
c
e
–
p
d

F
/

1
4
4
3
8
3
1
8
3
0
6
4
7
d
un
e
d
_
un
_
0
0
3
4
4
p
d

b
oui
g
toi
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

entrepreneurial attention. Bien sûr, it is
scarce because most of it is either in the
wrong place or the wrong form. Water is
not where the people want to use it; its sup-
ply is variable relative to human demands;
it is of the wrong quality (whether too sa –
line or too contaminated) to satisfy human
demands; or it is unattractive for some
com bination of these reasons.

This begs the question, why is water dif –
ferent from many other resources? Encore,
the answer is property rights. Water prob –
lems arise when there are competing de –
mands for scarce water, for which property
rights are not clear.

The dewatering of rivers in arid parts of
the American West offers a classic exam-
ple.8 Diversion rights to water in Oregon
and California’s Klamath River were suf –
½ciently well-de½ned to allocate the scarce
resource among competing uses, even if it
meant leaving the river dry. Cependant, être –
cause it was so costly to transfer water from
diversion to instream uses, it was neither
eco nomical nor possible to divert the river
to meet the en vironmental demands for
instream flows to support spawning salm –
on and steelhead, leading to further con-
flicts about re source allocation. Entrepre-
neurial respons es to competing demands
for water use, whether from increased
demands or re duced supplies, require re –
allocating water within the existing insti-
tutions or altering those institutions to
accommodate new constraints and new
allocations.

Water markets offer an increasingly im –
portant tool in institutional debates about
reallocation and resource use. This paper
½rst explains the importance of markets in
providing an interface between dynamic
human demands for water resources and
dynamic environmental conditions for
their supply. It then focuses on examples
of the role that entrepreneurs play in dy –
namic environments and dynamic mar-
kets.

Economists have traditionally analyzed

markets using comparative statics, com-
paring one equilibrium with another and
specifying the conditions required for the
equilibrium to hold. The standard black-
board assumptions of perfect information,
costless market transactions, and perfect
competition focus attention on points of
equilibrium in which the forces of supply
and demand are perfectly balanced.

Philosopher Mark Sagoff has confronted
economists who view markets and eco –
systems as equilibrium systems that can be
objectively valued for their contributions
to human welfare: “Ecological knowledge,
like any kind of empirical knowledge that
is relevant to economic activity, is too
spread out among people and too sensitive
to the moment to be captured by any one
individual or by any group–even scientists
given suf½cient resources.” Remarking on
recent attempts by economists and scien-
ti½c experts to assign values to ecosystem
services from the top down, Sagoff con –
cluded that the “‘ecosystem services’ proj-
ect is bound to fail in its attempt to substi-
tute an in natura calculus of value for the ar –
ti½ce of market price.”9 Instead of seeking
to valu ate ecosystems, markets aggregate
dis parate knowledge through entrepre-
neurial action.

Viewing markets as if they exist in equi –
librium distracts us from the market pro –
cesses, entrepreneurial activities, et en –
stitutional evolution that tend to move
mar kets in the direction of equilibrium.
Just as nature is never in equilibrium, nei-
ther are markets. Certainly equilibrium
con cepts are useful for developing hypoth –
eses and gaining insights into basic market
responses to changing conditions, mais ils
obscure the moving picture show of the
mar ket process.

Dynamic processes, found in both eco –
systems and markets, call for a better un –
derstanding of the connection between
ecol ogy and economics. In the words of

Terry L.
Anderson

D
o
w
n
o
un
d
e
d

F
r
o
m
h

t
t

:
/
/

d
je
r
e
c
t
.

je
t
.

e
d
toi
d
un
e
d
un
r
t
je
c
e
–
p
d

F
/

1
4
4
3
8
3
1
8
3
0
6
4
7
d
un
e
d
_
un
_
0
0
3
4
4
p
d

b
oui
g
toi
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

144 (3) Été 2015

The Case
for Water
Marketing

en vironmental writer Emma Marris, eco –
systems are “fundamentally stable entities
afflicted by changes from without and
within about as much as a ballet is a fun-
damentally static object afflicted with mo –
tion.”10 Marris’s description could just as
easily apply to markets that, although often
viewed as if they exist in balance, are fun-
damentally driven by a barrage of changes
from within and without.

Much like the interaction of organisms
in nature, the market process emphasizes
the interaction of individuals based on
factors that are time- and place-speci½c.
Just as individual species ½ll niches in eco –
systèmes, entrepreneurs ½nd market niches
and specialize in production and market-
ing to ½ll those niches. Successful entre-
preneurship requires the entrepreneur to
use local knowledge and resources more
ef½ciently than is the current practice. Comme
a result, inef½cient resource use in markets
and in ecosystems is crowded out in an
evo lutionary process where sustainability
requires pro½tability for survival.

In this sense, human action is ordered
spontaneously through market processes
just as animal and plant speciation is or –
dered through evolutionary processes. Dans –
formation on which niches are opened and
how they should be ½lled cannot be ac –
quired or ordained from the top down; it
requires responses to what economist and
Nobel laureate Friedrich Hayek described
as “rapid adap tation to changes in the par-
ticular circum stances of time and place.”11
The ability of market institutions to re –
solve conflicting human demands on the
environment relies on entrepreneurs who
reallocate inputs and outputs guided by
market prices and property rights. With
clear and transferable property rights,
own ers of resources will have to compare
the value they place on resources with of –
fers made by others. These competing val –
ues are embedded in prices, which provide
condensed information about individual

preference, resource scarcity, and technol-
ogy, among other inputs.

In her recommendations, Emma Marris
has summarized the modern challenges
facing environmentalists: “Give up ro –
man tic notions of a stable Eden, be hon-
est about goals and costs, keep land from
mindless development, and try just about
everything.”12 This is what entrepreneurs
do. In some cases, their decisions will be
wrong. Cependant, just as poor adaptations
in nature are eliminated, albeit slowly, via
evolutionary processes, bad decisions in
markets are purged by economic losses.

En résumé, the effectiveness of market
processes and entrepreneurship in adapt-
ing to changes in nature depends on well-
de½ned, enforced, and transferable prop-
erty rights to environmental resources. If
those rights exist, costs and bene½ts will
be internalized by owners. If they do not,
entrepreneurs are incentivized to establish
property rights in order to capture the ben –
e½ts of ownership. The evolution of prop –
erty rights may come from the bottom up
or from political processes that distribute
rights.13 In either case, there is no more
guarantee that property rights will be com –
plete than there is that governmental con-
trol allocation of environmental assets will
respond to dynamic ecosystem changes.

Water markets provide a way of adapt-

ing to a dynamic world of changing hu –
man demands for water and the changing
supplies of it. Doing so via water markets
requires that water rights be well-de½ned,
enforced, and transferable. Not surpris-
franchement, water rights vary considerably de –
pending on human demands relative to
natural supplies. The Eastern United
States relies mainly on the common law of
riparian rights, which gives riparian land –
owners an equal right to an undiminished
quantity and quality of water. This system
was appropriate given the relative abun-
dance of water in the East and the uses to

Dédale, le Journal de l'Académie américaine des arts & les sciences

D
o
w
n
o
un
d
e
d

F
r
o
m
h

t
t

:
/
/

d
je
r
e
c
t
.

je
t
.

e
d
toi
d
un
e
d
un
r
t
je
c
e
–
p
d

F
/

1
4
4
3
8
3
1
8
3
0
6
4
7
d
un
e
d
_
un
_
0
0
3
4
4
p
d

b
oui
g
toi
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

which water was put: namely, power gen-
eration and human consumption, rather
than diversion for irrigation.14 Because
prior appropriation rights are more clearly
speci½ed, they are more amenable to ex –
change.15 This system evolved in response
to “institutional entrepreneurs” who found
water law from the East inadequate for
purposes requiring diversion.16

The importance of property rights evo-
lution is seen in the recent allowance of
diversion rights to be converted to in –
stream flow rights. The prior appropria-
tion system was based on the “use it or lose
it” principle, which required diversion or
was considered abandoned, and therefore
could be claimed by others. Given the in –
creased value placed on instream flows for
water quality, recreation, and environmen-
tal amenities, entrepreneurs have brought
pressure to change the laws so that every
Western state today recognizes instream
flows as a bene½cial use of water.

Obstructing water entrepreneurs are a
variety of political impediments that raise
transaction costs for exchange. The battle
over water flowing through California’s
Central Valley into the San Francisco Bay
is the quintessential example.17 The rights
to Central Valley water are largely held by
agricultural users or are allocated through
contracts between agricultural users and
the state or federal government. Environ-
mental demands based on the need for
water to ensure survival of the delta smelt
or migrating salmon have been articulated
through political processes, especially the
Endangered Species Act. Because it is al –
most impossible to shift agricultural wa –
ter to environmental uses through market
transactions, the only alternative for en –
vironmentalists is politics in which the
stakes are high and the battles ½erce. Dans –
deed, given the slowness with which bu –
reaucracies move, there is good reason to
ex pect that they may be less dynamic than
market entrepreneurs.18

Terry L.
Anderson

Water markets provide an alternative to
political allocation that allows flexibility
in light of dynamic environmental con-
straints and human demands. The follow –
ing are examples of water markets at work
and reflect how entrepreneurs respond to
disequilibria.

Tradable water rights allow conserva-

tion organizations and agriculturalists to
negotiate mutually bene½cial agreements
to share the water. Par exemple, dans 2005,
Montana Water Trust (now the Clark Fork
Coalition) entered into a ten-year lease
agree ment with irrigators to reduce di –
versions along Tin Cup Creek in Western
Montana. The upper portion of Tin Cup
lies within the Selway-Bitterroot Wilder-
ness and provides critical native ½sh hab –
itat, fostering westslope cutthroat trout
and bull trout. The lower portion, cependant,
was heavily appropriated for irrigation use
and diversions that depleted stream flows
to levels insuf½cient for ½sh. With the lease
agreements in place and consequent re –
ductions in diversions, instream flow lev-
els were restored, reconnecting migration
routes between Upper Tin Cup Creek and
the Bitterroot River downstream. In Idaho,
the trout and salmon conservation organi –
zation Trout Unlimited collaborated with
the city of Pocatello to acquire senior water
rights upstream from irrigators. The added
flows help Trout Unlimited meet its goal of
restoring flows for Yellowstone cutthroat
trout while the additional water instream
im proves water quality and reduces the
city’s need to pump scarce groundwater.19
Just as markets are dealing with water

scar city issues, markets can also work to
address water quality concerns and the as –
sociated economic costs.20 Though the
Clean Water Act does not speci½cally au –
thorize markets in water quality credits,
the act’s directive to states to establish
plans to control point and nonpoint source

144 (3) Été 2015

D
o
w
n
o
un
d
e
d

F
r
o
m
h

t
t

:
/
/

d
je
r
e
c
t
.

je
t
.

e
d
toi
d
un
e
d
un
r
t
je
c
e
–
p
d

F
/

1
4
4
3
8
3
1
8
3
0
6
4
7
d
un
e
d
_
un
_
0
0
3
4
4
p
d

b
oui
g
toi
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

The Case
for Water
Marketing

pollution ultimately leads to the creation
of credit markets.21 States have been
drawn to incentive-based market schemes
for controlling pollutant sources because
they introduce flexibility in how effluent
targets are met, which reduces costs to reg –
ulated dischargers while encouraging re –
ductions in pollutant levels. The number
of water quality trading programs in the
United States has grown considerably
since the emergence of the ½rst generation
in the 1980s.22 The Environmental Protec –
tion Agency (epa) identi½es forty-eight
do mestic trading programs in twenty-½ve
states. Such programs are helping states
meet water quality standards more ef½ –
ciently and at reduced costs to regulated
in dustries.

Par exemple, in the Long Island Sound of
New York and Connecticut, runoff and ex –
cessive discharges from sewage treatment
plants into area streams were threatening
local ½sh and shell½sh populations. A co –
ordinated effort between the epa, the Con –
necticut Department of Environmental
Pro tection, the New York State Depart-
ment of Environmental Conservation, et
private organizations and landowners de –
veloped a watershed-based nutrient reduc –
tion plan. Through negotiation among the
various interests, the plan established a
statewide cap on the total amount of ni –
trogen that may enter the watershed, et
also allocated individual discharge targets
to seventy-nine municipal waste treatment
plants in the area. If it is too expensive for
one plant to meet its target level, it can buy
credits from other dischargers that have
reduced their pollution levels below their
respective targets or permitted levels. Dis-
charge sources with lower control costs
have the incentive to reduce pollution
amounts, thereby creating tradable pollu –
tion credits. Higher-cost dischargers can
buy credits and clean up less. Either way,
the net amount of discharge does not ex –
ceed the total allowed amount.

Cependant, water quality markets still rely
on governmental control to establish tar-
get levels of pollution. Such a strategy “pre –
sumes regulators are correct in their
knowledge about how much pollution is
‘right.’”23 But no matter how well-inten-
tioned or informed agency of½cials may be,
it is impossible for them to determine the
optimal limit on pollution in every case.
Agencies are subject to political pressures
et, in promulgating regulations, they set
uniform standards that are applied over an
overly broad range of pollution contexts.
In a true market approach to water quality,
the residual claimants determine the ac –
ceptable amount of pollution or level of
water quality and, through negotiation, le
contract for achieving the target level.

Most water quality trading programs are
driven by top-down regulations, but some
arise through bottom-up collective action.
Par exemple, Wichita, Kansas, is paying
up stream farmers in the Cheney Lake Wa –
tershed to reduce nutrient runoff tied to ag –
ricultural production.24 In the early 1990s,
algal blooms and increased sedimentation
in Cheney Lake alerted area residents,
farm ers, and the City of Wichita–which
re lies on the lake for drinking water–that
water quality was no longer something that
could be taken for granted. In a region
dom inated by agricultural users, the source
of the pollution was clear, and the offend-
ing farmers themselves decided something
had to change.

Like many nations, Australia is facing in –

creasingly scarce water resources, a product
of supply shocks and increasing competi-
tion among consumptive and environmen –
tal water demanders.25 The development
of Australian water markets ½rst re quired
institutional changes to provide opportu-
nities for formal markets and a means of
bal ancing water supplies and de mands.
Early reforms in the 1980s, which created
temporary trading opportunities, were fol –

Dédale, le Journal de l'Académie américaine des arts & les sciences

D
o
w
n
o
un
d
e
d

F
r
o
m
h

t
t

:
/
/

d
je
r
e
c
t
.

je
t
.

e
d
toi
d
un
e
d
un
r
t
je
c
e
–
p
d

F
/

1
4
4
3
8
3
1
8
3
0
6
4
7
d
un
e
d
_
un
_
0
0
3
4
4
p
d

b
oui
g
toi
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

lowed by broader reforms in 1994, quand
the Council of Australian Governments
(coag) endorsed the Strategic Frame work
on Water Reform, laying the foundation
for a nationwide transition to formal wa –
ter markets. Central to the re forms were
provisions for de½ning water entitlements,
severing water claims from land, et en –
corporating environmental flows into wa –
ter management plans. State and territorial
governments were tasked with rede½ning
entitlements in terms of ownership, vol-
ume, reliability, transferability, et, if ap –
propriate, qualité, while also developing
plans to manage water for instream appli –
cations.26 The reforms in the 1990s re sult –
ed in “considerable prog ress toward more
ef½cient and sustainable water manage-
ment.”27
If water problems are caused by either the

fact that water is not where the people
want to use it, that its supply is variable rel –
ative to human demands, that it is of the
wrong quality to satisfy human de mands,
or some combination of the three, ils
will be exacerbated by climate variability.
In the context of water, climate change is
best thought of in terms of what it means
for variations in water supplies and de –
mands. In his book Windfall: The Booming
Business of Global Warming, Mc Kenzie Funk
explains that market responses to climate
variation are “tribal, primal, pro½t-driven,
short-term, and not at all idealistic.”28 Seen
this way, water markets provide an alterna –
tive way of dealing with increased climate
variance.

John Dickerson, ceo of Summit Global
Management, is harnessing water markets
in response to climate variation by invest-
ing in what he calls “wet water”–in con-
trast to water infrastructure–through the
purchase of water rights in America’s Colo –
rado River basin and in Australia’s Murray-
Darling basin. As noted above, both sites
have reasonably well-de½ned, en forced,

and tradeable water rights to facilitate wa –
ter marketing. According to Dickerson,
“The real future is going to be the direct
assets–not through the medium of a util-
ville, not through the medium of a pump
company–but the direct, physical water
assets.”29 Or as Funk puts it, “Carbon
emis sions are invisible, temperatures are
an abstraction. But melting ice, empty res –
ervoirs, lapping waves, and torrential rain –
storms are physical, tangible–the face of
climate change. Water is what makes it all
real.”30

Dickerson had trouble raising money for
his fund until the publication of Al Gore’s
Inconvenient Truth kick-started the mar-
ket.31 Fifteen water mutual funds started
dans 2007, more than doubling the preexist-
ing number. Funk reports that “[je]n two
années, the amount of money under man-
agement ballooned tenfold to $13 milliard.
Credit Suisse, ubs, and Goldman Sachs
hired dedicated water analysts.”32

To help markets along, governments
need to follow the lead of Western U.S.
states and Australia by making water rights
more secure and by encouraging trading.
As Dickerson has put it, governments can
“allow water to be priced at what it’s worth,
then create a mechanism by which the rice
farmer can sell his water to the wine pro-
ducer.”33 By buying low and selling high in
the American West’s Colorado River basin
and in Australia’s Murray-Darling basin,
Dickerson and other speculators are re –
ducing water waste, improving water use
ef½ciency, and hedging against fluctuations
in water supply caused by climate variation.

The proposal to create a Colorado River
water bank illustrates another way in which
markets can adapt to climate variation.34
In Colorado, agricultural users on the west
slope of the Rocky Mountains have more
senior water rights than municipal users
on the west slope, who divert water east-
ward across the continental divide. As long

Terry L.
Anderson

D
o
w
n
o
un
d
e
d

F
r
o
m
h

t
t

:
/
/

d
je
r
e
c
t
.

je
t
.

e
d
toi
d
un
e
d
un
r
t
je
c
e
–
p
d

F
/

1
4
4
3
8
3
1
8
3
0
6
4
7
d
un
e
d
_
un
_
0
0
3
4
4
p
d

b
oui
g
toi
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

144 (3) Été 2015

The Case
for Water
Marketing

as there is suf½cient water to meet both se –
nior and junior water rights holders, là
is no problem; but when droughts limit
supplies, the east-slope municipalities are
the ½rst to go dry.

To make matters worse, drought in the
upper reaches of the Colorado River is not
the only event that drives scarcity: de –
mands from states at the lower end of the
river–Nevada, Arizona, and California–
who have claims to a share of the river’s
flow through the Colorado River Compact,
can further jeopardize water supplies for
east-slope communities. Under that 1922
compact, states in the upper basin (Colo –
rado, New Mexico, Utah, and Wyoming)
are required to deliver 7.5 million acre-
feet of water per year on a ten-year rolling
average to the lower basin states (Arizona,
California, and Nevada). If the ten-year
rolling average falls below 7.5 million acre-
pieds, the lower basin states force a “com-
pact curtailment” on the upper basin
states. Dans ce cas, upper basin junior wa –
ter rights holders, including many east-
slope municipalities, would be the ½rst to
be cut off.

Assuming that the marginal value of wa –
ter to east-slope municipalities is greater
than it is to west-slope irrigators, a water
bank could signi½cantly improve water use
ef½ciency. The proposed bank would al –
low west-slope irrigators with senior rights
to deposit their rights in a central record-
ing system from which east-slope munic-
ipalities with junior rights could purchase
a call on the deposited rights. If a compact
curtailment occurred, the bank would re –
quire lower value irrigation users to meet
the call by reducing their diversions, là –
by allowing higher-value municipal users
to continue their consumption. In a world
of greater climate variation, water bank-
ing of this sort offers ef½ciency gains with –
out political battles to determine who gets
how much water.

Enfin, consider how climate variation

can affect conservation efforts: in this case,
habitat for migratory shorebirds on their
annual journey from South America and
Mexico to the Arctic. This journey takes
many of the birds through California’s
Cen tral Valley, where water engineers have
harnessed the natural systems to provide
water for agricultural, municipal, et en –
dustrial uses. In the process, 95 percent of
the original wetlands have disappeared.35
BirdReturns, an innovative market
trans action between bird lovers and farm –
ers, is working to restore wetlands to the
region, thereby welcoming birds back. Le
transaction begins with bird watchers who
use a smartphone app called eBird to re –
cord shorebird sightings, which are then
used by the Cornell University Ornithol-
ogy Lab in New York to map where water
is needed. The Nature Conservancy then
uses private donations to pay farmers to
flood the ½elds–which otherwise would
have been drained–most directly in the
migratory bird flight path. Given that the
birds are only there for a short time, le
Na ture Conservancy does not have to pur –
chase the water outright; it only needs to
“rent” it when the birds are in residence.
The Nature Conservancy uses a reverse
auc tion in which farmers submit bids and
the lowest bidder willing to provide water
wins. Through this competition, the Na –
ture Conservancy keeps down the costs of
achieving its goal.

The ½rst season of the program ended in
Avril 2014, with birders having reported
sightings of all species of birds they hoped
to attract to what they have called “pop
up” wetlands: ten thousand flooded acres
owned by forty farmers. Birders hope to in –
crease the number of shorebirds stopping
in California from one hundred seventy
thousand to four hundred thousand in
both the spring migration north and the
fall migration south. Although it is too
soon to assess the program’s overall suc-

Dédale, le Journal de l'Académie américaine des arts & les sciences

D
o
w
n
o
un
d
e
d

F
r
o
m
h

t
t

:
/
/

d
je
r
e
c
t
.

je
t
.

e
d
toi
d
un
e
d
un
r
t
je
c
e
–
p
d

F
/

1
4
4
3
8
3
1
8
3
0
6
4
7
d
un
e
d
_
un
_
0
0
3
4
4
p
d

b
oui
g
toi
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

cess, its potential is summed up by Mark
Reynolds, the Nature Conservancy scien-
tist who heads the program: “Migratory
birds are a daunting challenge. It’s a hemi –
spherical scale, and it’s seasonal, and every
species has a different life history. This pro –
gram allows us to be strategic with scarce
conservation dollars.”36

Because the challenge is even more com –
plicated in light of climate variation, inno –
vative contracting of this sort offers great
hope for conservation interests.

Dynamic market responses to changing

relative prices have always been the best
response to the dynamic world in which
we live. Typiquement, we associate market
pric es as a way of connecting demanders
and suppliers of material goods and ser –
vices, but they are even more important as
a mechanism for connecting human de –
mands on our natural world with the dy –
namic forces of nature. Prices provide
con densed information about human de –
mands and, if property rights to inputs are
clear and transferable, they provide simi-
lar information about the human value of
resources in competing uses. When hu –
man values for nature’s bounty change, dans –
trepreneurs who recognize the change have
an incentive to economize by reallocating
resources to higher-valued uses. And when
the dynamic forces of nature increase or
decrease the supply of resources, prices
will speak on nature’s behalf.

Successful entrepreneurship recognizes
when human demands and nature’s supply
are in discordance, and reallocates re –
sources in ways that harmonize the two.
Pro ducing more with fewer resources, dis –
covering new sources, and developing
tech nologies that better use resources are
all tools in the entrepreneur’s kit.

In order for dynamic markets to respond
to dynamic environments, the right insti-
tutions–namely, well-de½ned, enforced,
and tradeable property rights–must be in
place. Where these institutions exist, as in
the American West and Australia, eau
markets are encouraging development of
new supplies, water use ef½ciency, et
tech nological innovation. Climate varia-
tion adds another element to the demand
and supply mix to which dynamic markets
may respond. Whether they will respond
depends largely on the property rights in –
institutions, lequel, all too often, are not con –
ducive to market transactions. In such
cases, the link between dynamic markets
and dynamic ecology is broken. The ques –
tion then is whether politics can be dy –
namic enough either to facilitate the cre-
ation of new property rights and reduce
trans action costs or to respond to dynam –
ic ecology. There are some bright signs in
the emergence of water markets, mais, comme
Mark Twain supposedly put it, “Whiskey is
for drinkin’ and water is for ½ghtin,’” and
legislatures and courts are often the bar-
room in which the ½ghtin’ occurs.

Terry L.
Anderson

D
o
w
n
o
un
d
e
d

F
r
o
m
h

t
t

:
/
/

d
je
r
e
c
t
.

je
t
.

e
d
toi
d
un
e
d
un
r
t
je
c
e
–
p
d

F
/

1
4
4
3
8
3
1
8
3
0
6
4
7
d
un
e
d
_
un
_
0
0
3
4
4
p
d

b
oui
g
toi
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

endnotes
1 See Ronald H. Coase, “The Problem of Social Cost,” Journal of Law and Economics 3 (Octobre

1960): 1–44.

2 See Harold Demsetz, “Toward a Theory of Property Rights,” American Economic Review:
Papers and Proceedings 57 (2): 347–359; and Terry L. Anderson and Peter J. Hill, “The Evolu-
tion of Property Rights: A Study of the American West,” Journal of Law and Economics 18 (1):
163–179.
3 Daniel B. Botkin, The Moon in the Nautilus Shell: Discordant Harmonies Revisited (Oxford: Oxford
Presse universitaire, 2012), 3.

144 (3) Été 2015

The Case
for Water
Marketing

4 Ibid., 18.
5 This analysis may seem unduly anthropocentric because it presumes that property rights are
held by humans over nature. Some legal scholars have argued that flora, fauna, and even
inanimate objects have rights, but accepting this, those rights can only be expressed by
humans making claims for things in nature. All rights that have any meaning in our world
therefore boil down to human rights, even if those rights are expressing an intrinsic value of
nature.

6 Matt Ridley, “The Natural Order of Things,” The Spectator, Janvier 7, 2009, http://www
.spectator.co.uk/features/3213246/the-natural-order-of-things/ (accessed March 31, 2014).
7 Daniel B. Botkin, Discordant Harmonies: A New Ecology for the Twenty-First Century (New York:

Presse universitaire d'Oxford, 1990).

8 See Charles J. Vörösmarty, Michel Meybeck, and Christopher L. Pastore, “Impair-then-
Repair: A Brief History & Global-Scale Hypothesis Regarding Human-Water Interactions in
the Anthropocene,” Dædalus 144 (3) (2015): 94–109.

9 Mark Sagoff, “The Quanti½cation and Valuation of Ecosystem Services,” Ecological Economics

70 (3): 497–502.

10 Emma Marris, Rambunctious Garden: Saving Nature in a Post-Wild World (New York: Bloomsbury

usa, 2011), 34.

11 Friedrich A. Hayek, “The Use of Knowledge in Society,” American Economic Review 35 (4):

519–530.

12 Marris, Rambunctious Garden, 170.
13 See Terry L. Anderson and Peter J. Hill, The Not So Wild, Wild West: Property Rights on the Fron-

tier (Stanford, Calif.: Stanford University Press, 2004).

14 Increasing urban demands that require water diversion and delivery to cities not located on
streams have challenged the riparian system. See Terry L. Anderson, Brandon Scarborough,
and Lawrence R. Watson, Tapping Water Markets (New York: rff/Routledge, 2012), ch. 6.
15 The priority system could also be based on an equal sharing or on a collective determination
of the importance of various uses when supplies are not suf½cient to meet all demands. Le
important element of water rights for market transactions is that they be clearly de½ned,
enforced, and transferable.

16 For further discussion of institutional entrepreneurship, see Anderson and Hill, The Not So Wild,

Wild West, ch. 2.

17 See Katharine L. Jacobs and Lester Snow, “Adaptation in the Water Sector: Science & Insti-

tutions,” Dædalus 144 (3) (2015): 59–71.

18 For a good discussion of political and bureaucratic processes, see Randy T. Simmons, Au-delà
Politique: The Roots of Government Failure (Oakland, Calif.: Independent Institute, 2011).
19 Trout Unlimited, “Western Water Projects,” http://www.tu.org/tu-programs/western-water.
See also Clark Fork Coalition, “Bitterroot,” http://clarkfork.org/our-work/where-we-work/
bitterroot/.

20 See Adena R. Rissman and Stephen R. Carpenter, “Progress on Nonpoint Pollution: Barri-

ers & Opportunities,” Dædalus 144 (3) (2015): 35–47.

21 Esther Bartfeld, “Point-Nonpoint Source Trading: Looking Beyond Potential Cost Savings,»

Environmental Law 23 (1993): 43–106.

22 In a worldwide survey, the World Resources Institute identi½ed six trading programs outside
the United States: four active programs (three in Australia and one in New Zealand) and two
in development (one in Australia and one in New Zealand). See Mindy Selman, Suzie Green-
halgh, Evan Branosky, Cy Jones, and Jenny Guiling, “Water Quality Trading Programs: Un
International Overview,” WRI Issue Brief, No.1 (Mars 2009).

Dédale, le Journal de l'Académie américaine des arts & les sciences

D
o
w
n
o
un
d
e
d

F
r
o
m
h

t
t

:
/
/

d
je
r
e
c
t
.

je
t
.

e
d
toi
d
un
e
d
un
r
t
je
c
e
–
p
d

F
/

1
4
4
3
8
3
1
8
3
0
6
4
7
d
un
e
d
_
un
_
0
0
3
4
4
p
d

b
oui
g
toi
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

23 Roger E. Meiners and Bruce Yandle, Reforming the Clean Water Act (Washington, D.C.: Manu –

facturers’ Alliance for Productivity and Innovation, 1994), 91.

Terry L.
Anderson

24 Reed Watson and Brandon Scarborough, “Cheney Lake Watershed: Farming Water Quali-
ty in Kansas,” PERC Case Study (Bozeman, Mont.: The Property and Environment Research
Centre, 2010).

25 See Richard G. Luthy and David L. Sedlak, “Urban Water-Supply Reinvention,” Dædalus 144 (3)

(2015): 72–82.

26 Jeffery Bennett, The Evolution of Markets for Water: Theory and Practice in Australia (Cheltenham

Glos, United Kingdom: Edward Elgar, 2005), 78.

27 Council of Australian Governments, Intergovernmental Agreement on a National Water Ini-

tiative, http://www.nwc.gov.au/nwi.

28 McKenzie Funk, Windfall: The Booming Business of Global Warming (New York: The Penguin

Presse, 2014), 8.

29 Ibid., 121.
30 Ibid., 118.
31 Al Gore, An Inconvenient Truth: The Planetary Emergency of Global Warming and What We Can Do

about It (New York: Rodale Books, 2006).

32 Funk, Windfall, 118.
33 Quoted in ibid., 133.
34 For further discussion, see Reed Watson and Brandon Scarborough, “Colorado River Water
Bank: Making Water Conservation Pro½table,” PERC Case Study (Bozeman, Mont.: The Prop –
erty and Environment Research Center, 2010), perc.org/articles/colorado-river-water-bank
-making-water-conservation-pro½table.

35 For a complete discussion, see eBird, “Help tnc by eBirding in California’s Central Valley,»

Janvier 21, 2014, http://ebird.org/content/ebird/news/tnc_birdreturn/.

36 Quoted in Jim Robbins, “Paying Farmers to Welcome Birds,” The New York Times, Avril 14, 2014,

D
o
w
n
o
un
d
e
d

F
r
o
m
h

t
t

:
/
/

d
je
r
e
c
t
.

je
t
.

e
d
toi
d
un
e
d
un
r
t
je
c
e
–
p
d

F
/

1
4
4
3
8
3
1
8
3
0
6
4
7
d
un
e
d
_
un
_
0
0
3
4
4
p
d

b
oui
g
toi
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

144 (3) Été 2015

93
Télécharger le PDF