In my grade school in Chandler, Minn., 50 years ago, we did not study economics or hydrology, but we understood inklings of both. “Flush twice, Edgerton has a water shortage!” we joked to each other in the bathroom. We knew that Chandler’s sewers dumped into Chanarambie Creek and that Edgerton, eight miles or so downstream, had an inadequate municipal well not far from the same creek.
Whether that well’s aquifer was actually “hydraulically connected” to the creek, I don’t know. But even as 10-year-olds, we appreciated the complicated challenges of managing water.
Hydrology, particularly the interactions between ground and surface waters, is inherently complex.
Moreover, water use is rife with what economists call “externalities”: Economic decisions about using water frequently affect others who, in the absence of law or regulation to the contrary, have no say in the first person’s decisions. And economics clearly shows that uncontrolled externalities cause inefficiency, so society gets fewer goods and services from a given set of resources.
All that is background to understanding the economics underlying the policy challenges implicit in a series of excellent articles on water problems in Minnesota written by a team of Pioneer Press reporters.
Start with the distinction between “stock” and “flow” resources. Stock resources, like iron ore or coal, are fixed in quantity, at least in human time as opposed to geological time. Flow resources, like sunlight or wind, are produced continuously and, in practical terms, won’t run out even if widely used.
Water is both a stock and a flow resource. The hydrologic cycle of rainfall, infiltration or runoff, followed by evaporation and new rainfall, ensures that new fresh water is produced continuously. But there also is water in some aquifers, usually deep ones, for which recharge is so slow that for all intents and purposes, that water is as finite as hematite was on Minnesota’s iron ranges.
To the east of the Rockies, there are some aquifers containing what geologists call “fossil water” that has been there for thousands of years. As it is pumped out for irrigation and municipal use, it is not replaced.
Decisions about how fast to use up such stock resources get into a society’s “time preference.” How much are we willing to give up today to have more in the future and vice versa? Flow resources don’t present this complication.
Both categories often involve externalities however. Externalities occur when someone who can decide about the use of a resource reaps all the benefits of such use without bearing all the cost.
Economic theory is clear that in such cases, the resource will be used beyond the point of greatest economic efficiency. And one person will be harmed by the activities of another.
Some decades ago, whenever a certain farmer pumped his irrigation well, it dried out the small sand-point wells of 21 nearby lakeshore cabins. Their lack of water was an external cost of his irrigation.
White Bear Lake, located adjacent to the Twin Cities suburb of the same name, gets water from upstream in a very limited watershed and is hydraulically connected to aquifers.
Changed land use has reduced surface water inflows. Increased pumping from the connected aquifer has increased outflows. Someone benefits from the new use of land or from the water pumped, but other people who have lived on the lake for decades no longer have lakefront homes — they haven’t moved, the lake has. That is an external cost.
In the farmer irrigation case, both the winner and the losers from the activity were clearly identifiable. For White Bear Lake, the losers are identifiable, but the winners are diffuse. And the situation can be much more ambiguous.
Chanarambie Creek runs through our farm, halfway between Chandler and Edgerton, near my old elementary school. Residues from the glyphosate herbicide and synthetic fertilizers applied to the cropland leach into drainage tile that dumps into the creek. From there, they successively flow downstream into the Rock, Big Sioux, Missouri and Mississippi Rivers and eventually contribute to the “dead spot” in the Gulf of Mexico.
Farmers across this watershed benefit from being able to use farm chemicals. And food is much cheaper for the general population than it would be if such chemicals were banned. But other people are harmed by their use.
Striking the right balance through regulation is hard. Libertarians, following the ideas of Nobel Laureate Ronald Coase, argue that we should not regulate.
Instead, simply have laws strictly defining property rights and then let involved parties settle disputes in court.
In the case of the irrigation well, if the law says irrigators must pay for damages, then the farmer would have to provide a new water source for the cabin owners.
If the law instead said, as it does in some states, that the cabin owners were responsible for constructing wells that “fully penetrate the aquifer,” then they would have to bear the cost or collectively pay the farmer to not irrigate.
However, those hurt by falling levels in White Bear Lake would have a hard time identifying whom to sue.
And for those people a thousand miles or more downstream who are hurt by agricultural runoff, the task of identifying those responsible is impossible.
There is much more in water economics, particularly the role of price in allocating scarce water. But this has been a good start.