Water: Commodity or Commons? - Suzi Kerr, Motu
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Water: Commodity or Commons? Suzi Kerr, Motu (with Andrew Coleman and Josh Pemberton) Network Waitangi Otautahi, Feb 3013
Both – in balance?
1. Economics and valuing water
2. Institutions: community management (local
commons) and regulation
3. Institutions: markets
Economics and valuing water
• What are economists doing when they value the
environment?
• Which assumptions do they make that thinkers in
other disciplines might challenge?
• How might “value” be conceived of by non-
economists?
Why is economics used to value the
environment?
• Evaluating options: cost-benefit analysis
• An objective way to make decisions?
What do economists mean by
“value”?
• Value in exchange
• As compared to value in use: Smith (1776)
• Diamonds vs. water paradox
• Value as a subjective statement of individual
preferences: Hicks (1939), Debreu (1959)
• As compared to something external such as labour: Ricardo
(1821), Marx (1867)
How does economics value
environmental goods?
Total economic value
Use value Option Value Non-use value
Market Non-market Existence BequestHow does economics value
environmental goods?
• Revealed preference techniques
• Stated preference techniques
• Aggregating values
• Value as a statement of preference relative to other
goodsIssues with preference aggregation
• How do we make interpersonal comparisons
(Harsanyi, 1955)
• In politics
• When we value the environment
• Scenario 1: (0.10 x $90) + (0.01 x $10) = $9.10
• Scenario 2: (0.10 x $10) + (0.01 x $90) = $1.90Issues with preference aggregation
• How do we make interpersonal comparisons
(Harsanyi, 1955)
• Comparisons between societies
• Richland: 0.1 x $200 = $20
• Poorville: 0.1 x $20 = $2
• Basel Convention
• Future generations (Fitoussi et al, 2009)
• ‘Endogeneity’ – their constraints and preferences depend on
our decisions nowHow else might “value” and “the
environment” be understood?
• Intrinsic value: (Næss 1988)
• Environment not an asset: spiritual view (Roberts,
1995)
• Preferences might not reflect moral concerns as to
“right” and “wrong” (Flynn, 2000) or Kantian duties
(Kant, 1785)
• Law: value in process, not just outcome (Dicey, 1885)
(Bingham, 2010)
• Incommensurability (Raz, 1998)What can economics contribute?
• Role of concepts such as scarcity and opportunity cost
• Thinking of value in terms of preferences, and weighting
these to sum across individuals are normative choices.
• Is use of economics inherently in conflict with spiritual
and moral incommensurable values?
• Preferences can reflect needs of future generations
(etc), moral concerns, but do not necessarily do so.
• Intrinsic value is, by definition, incapable of being
reflected in preferences.The value of water?
value
Value of extra water
Incommensurable value?
Water in streams
Personal water useWhat does this mean for decision
making?
• The cost-benefit framework for valuing the
environment is premised on challengeable
assumptions.
• Communication across disciplines will be enhanced if
we are aware of these assumptions, and of the
strengths of the economic approach.
• How and why we value water should affect how we
govern and manage itInstitutions: community management
(local commons) and regulation
In 1990, two landmark economics books were
published:
Douglass C. North Institutions, Institutional Change, and
Economic Performance.
Elinor Ostrom Governing the Commons: The evolution of
institutions for collective actionBoth were based on historical analysis of the way groups
of people/societies/ countries developed
institutions - rules - to organise the way they
conduct themselves.
North emphasised that societies have
1. formal rules
2. informal rules
3. enforcement mechanismsOstrom investigated the way that groups / societies sometimes develop institutions to solve “common pool resource” allocation problems: 1. fishing 2. “commons” grazing 3. water abstraction and use 4. forest use 5. pollution 6. irrigation 7. climate change
Resource
catchment
Regulation
Voluntary instruments
Regulation
Price based
instrumentsments
Technology Education
InformationCommon Pool Resources
These are natural or human-created resources where
1. one person's use reduces other peoples’ use, either now
or in the future
2. It is difficult or costly to exclude other people from using
the resource.
Common Pool Resources have traditionally been
considered subject to the “tragedy of the
commons”A game theory representation of the tragedy of the commons Player 2 Extract Extract Player 1 cooperatively exploitatively Extract (10,10) cooperatively Extract (5,5) exploitatively
A game theory representation of the tragedy of the commons Player 2 Extract Extract Player 1 cooperatively exploitatively Extract (10,10) (4,14) cooperatively Extract (14,4) (5,5) exploitatively
The efficient solution is to cooperate But each player has an incentive to cheat no matter what the other player does The “Nash equilibrium” is that both extract exploitatively, leading to suboptimal results for everyone.
Common Pool Resources
According to the tragedy of the commons, CPRs are
subject to inefficient undersupply or overuse.
1. They are undersupplied if those who provide them cannot
stop others from using them
2. They are overused if a user extracts more than they
otherwise because of concern others will use the resource
if they don’t.Common Pool Resources
Traditionally, it has been argued that to solve the
tragedy of the commons:
1. The resource can be regulated by a government
2. The resource can be privatised so the costs and benefits of
using the resource are internalised.Government regulation: cheaters are punished
Player 2 Extract Extract
Player 1 cooperatively exploitatively
Extract (4,14)
(10,10)
cooperatively (4,0)
Extract (14,4)
(5,5)
exploitatively (0,4)Common Pool Resources
Ostrom argued that neither methods were always successful
(1) It is expensive for a government to monitor whether people
are cooperating or cheating.
(2) A government may not always catch cheats, or may punish
falsely people who are cooperating
(3) A government may not impose the correct fines
(4) A government may not know the appropriate carrying
capacity
(5) It may not be easy or desirable to create clear property rights
over a resource such as water.Common Pool Resources
Ostrom observed that historically the problem was often solved
by small groups of people forming an institution - rules and
enforcement mechanisms – governing the use of the
common pool resource.
Small groups can sometimes solve these issues because the
“game” is repeated many times, raising significantly the
benefits of cooperation.
Small groups of users are also very good at monitoring, so can
quickly tell if someone is cheating
Small groups can negotiate agreements at low cost.Common Pool Resources
By analysing a large number of examples, she derived
conditions where
1. A group organised itself to efficiently use a common pool
resource
2. Groups were unable to organise themselves to solve the
tragedy of the commons.Example: Fishing in Alanya, Turkey
•Inshore fishery
•Fisherman ballot for a sequence
of turns to different spots
•Self-monitoring: when it is your
turn to good spot you go out
early
•Group enforcementExample: grazing Swiss mountaintops
•Existed 6 centuries
•Well defined private property
rights plus common rights to
graze cows
•Strict rules covering entitlement
to graze, boundaries, obligations,
enforcements
•Democratic evolution of rights
•Considerable diversity of rules
to meet local needsExample: Water in Valencia, Spain
•Many examples of water rights
go back 1000 years in arid region
•Irrigation rights clearly
specified: farmers can abstract
what they need , but only in turn
•Open weekly water court still
meets, judgements are oral but
binding, and can exclude farmers
from future access
•Self monitoring as water is
scarce and farmers waiting their
turn observe actions of others.7 conditions for cooperative solutions to CPR problems
(1) Clearly defined boundaries
Individuals or households who have rights to abstract must be
clearly defined, as must the boundaries of the CPR7 conditions for cooperative solutions to CPR problems
(2)Appropriate rules for local conditions
The appropriation rules restricting time, place, technology and
quantity of extraction are related to local conditions.7 conditions for cooperative solutions to CPR problems
(3)Collective Choice Arrangements
Most individuals affected by the operational rules can
participate in modifying the rules7 conditions for cooperative solutions to CPR problems
(4) Monitors
Monitors, who actively audit CPR conditions and appropriator
behaviour, are accountable to the appropriators – or are
the appropriators themselves.
Low cost monitoring is usually by design: people work in
teams, or a resource is handed from one user to another
with incentive to monitor7 conditions for cooperative solutions to CPR problems
(5) Graduated Sanctions
There should be a graduated scale of punishments for
violators, taking into account experience and seriousness
of the offence.
Punishment is costly. At time external enforcement may be
needed.7 Conditions for cooperative solutions to CPR problems
(6) Conflict resolution mechanisms
Appropriators and officials have rapid access to low cost local
arenas to resolve conflicts among appropriators or
between appropriators and officials7 Conditions for cooperative solutions to CPR problems
(7) Minimal recognition of rights to organise
The rights of appropriators to devise their own solutions are
not challenged by external government authorities7 Conditions for cooperative solutions to CPR problems (8) Large systems need nested levels
Limitations and failure
• The above examples tend to be local and
small (up to several thousand appropriators)
• Why do cooperative solutions fail, and why
aren’t there more of them?Limitations and failure
(1) (Robert Bates) These institutions have
considerable organisational costs……and
these costs are themselves a common pool
resource problem that can be difficult to
solve.
There is an incentive to free-ride on these costs
These cost are much higher when there are heterogeneous
users and or resource usesLimitations and failure
(2) Central Government interference.
There is considerable tension for the desirability of local
solutions to local circumstances, and the wish for
Governments to impose “one-size-fits all” rules to achieve
environmental objectives.
Central government need to devolve decision making rules to
local groups
Need to solve:
Who exercises the authority to make the rules?
What is the content of the rules?Limitations and failure
Often-times government rules are too clumsy/ lack local
monitoring and enforcement to solve the problem
Imposition of external access rules is a major reason for
collapse of local fisheries in many areas, and for the
exploitation of local forests.Limitations and failure
But…..
Local groups can go off the rails and expropriate, not manage.
Checks and balances are needed.
Local groups may need government to solve complex conflict
situations/ conduct enforcement/ fend off invasive
outsiders.
Local groups often need funding…
=> One solution is to form a network of local groups to
provide counterbalance to government.Limitations and failure
(3) Rapid increase in resource price/ local population
Management of a resource is endogenous to the level of
scarcity. Typically water rights are not needed where
water is plentiful.
A steep increase in the incentive to expropriate (one of gains
are greater than the returns from repeat usage) can
undermine the incentives for local management.
Local agents have inadequate ability to compete with
outsidersConclusion
Voluntary mechanisms can work and have worked to
solve resource issues
There is a lot of knowledge about the circumstances
where they are successful
Clear boundaries, monitoring, and enforcement are
crucial.
Appropriate relation with central Government is vital.Institutions: Markets for quality and quantity allocation
How could we allocate rights to discharge nutrients and use water efficiently, equitably and acceptably? How can we handle water if we do make it a commodity?
Initial allocation in regulatory context
Perfectly flexible Rigid – no
transfers of rights movement of
(e.g. Perfect rights
market) (e.g. Non-
transferrable
riparian rights
Only need to focus Equity and
on equity efficiency may be
in conflictWater markets (quality or quantity)
• mobilise private information and innovation
• are not the only solution / not market or other
solutions
Need enough heterogeneous actors and abatement options/ideas to
make it worthwhile and to function well
Complementary instruments – education, social pressure, … essential
• don’t directly raise rights definition,
monitoring/compliance costs
Any limit that has property-specific obligations must allocate, monitor
and enforce.
Trading can reduce these costs by lowering cost pressure
• Process to define and share allowances is criticalPrinciples for allocation
1. Equal sharing
2. “Polluter pays” – but who is
responsible?
3. From each according to his(her) ability
to payAllowance allocation determines cost sharing/net gains • Public gains benefits from protection • Landowners pay mitigation costs • How allowances are allocated and whether auctions/buy backs are used determines final cost sharing • Administrative allocation – determines mitigation costs • In a market: Those who can sell, gain. Those who need to buy bear extra costs.
Markets: translating principles into allowance
allocation options
Marginal cost
$
Environmental
limit
BAU
Unregulated position Cap pristine
Controllable nutrients/water useMarkets: translating principles into allowance
allocation options
Marginal cost
$
P*
BAU Cap Controllable
nutrients/water useMarkets: translating principles into allowance
allocation options
Marginal cost
$
P*
Allowance
value
BAU Cap Controllable
Abatement cost
nutrients/water useCost sharing among sources/users Equity 1. Compensate for loss in asset value Capitalisation of direct mitigation costs and lost opportunities 2. Don’t penalise those who have mitigated Allocate on basis of potential not just historic nutrient loss/water use Efficiency 3. Avoid strategic behaviour – ‘baseline grabbing’ Allocate on fixed or historic basis 4. Minimise adjustment costs Allocate on basis of current emissions
Short versus long-term allocation Short term Efficiency issues in markets and costs of adjustment – tend toward grandparenting Existing users have paid for value in land/improvements values Long term Markets are likely to become more efficient. Assets depreciate and best practice is easier. Farmers with debt have high discount rates Equity issues dominate – tend toward allocation to potential users; community
Key take-away messages on markets and allocation • Increase flexibility where possible to reduce need to consider efficiency in initial allocation • Focus on equity of cost bearing (resource sharing) – not allocation itself • Avoid reallocation – set out transition path at start • Make rights clear and stable Clear rules for when/how they will change
Summary - value
• Water has many values – some are captured by
economics and some not
• Which values are important should drive
governance
• Clearer discussion and better information can lead
to better decisions
• Role of economics:
• How to maximise value to collection of individuals
• How benefits and costs will be distributed across
individualsSummary – institutions and markets
Small cohesive Large,
group heterogeneous
Low pressure group
High pressure
Community Formal regulation
governance Informs development of
informal formal institutionsSummary – why markets? Markets Engages many actors in searching for solutions Separate three issues to make decision making simpler Environment: Limits and compliance Efficiency Distribution
www.motu.org.nz
How can we be smart?
Focus on what we really care about – economic
growth may be the result but it is not the main
objective
Political freedom
Strong social networks
Absence of corruption
Equality and Social
stability of well-
Mental health wellbeing being
Friends, family
Job – job stability
Relative income levelsWhat drives wellbeing? Relative incomes matter most not absolute levels (Easterlin Paradox) Loss of income matters more than gain – therefore focus on stability and sustainability “Political freedom, strong social networks and an absence of corruption are together more important than income in explaining well-being differences between the top and bottom countries. At the individual level, good mental and physical health, someone to count on, job security and stable families are crucial” World Happiness Report
You can also read
