Role of Property Rights

1. Role of Property Rights Mechanisms developed by society To set limits on resource use before diminishing returns set in To meet needs across space and through time with greatest efficiency

2. Standard economic view of property rights Well-defined property rights Market mechanisms and a pricing system No transaction costs No income effects Assumes collective action problems solved

3. Private property solves production (and environmental) problems Can anticipate diminishing returns: incorporate foregone benefits into present production decisions (Hotelling) Private property rules provide means to maintain efficiency even when environmental externalities exist (Coase)

4. Possible problems Definition of the property itself Enforceability of exclusionary rights Optimality

5. Common Property: Tragedy of the Commons Resource that is: Depletable Non-exclusive Rival Joint, fugitive

6. Common Property Resource unit defined Well-delineated user group Multiple users Explicit rules of extraction

7. Why Common Property? Nature of resource Economies of scale Maintenance or capital demands Enforcement

8. The Example of water Common good aspects Competitive use Particular spatial distribution creates asymmetries Upstream-downstream Common pool: technology differences lead to differential access Unequal political power International aspects compound problems

9. Debates about water Debate over nature of resource Symbolic aspects: natural right Water as economic good Debate about most effective management strategies

10. Symbolic aspects: natural right Open access? BUT Demographic growth Urbanization: concentration of demand Agricultural intensification 70% of water used for irrigation Changing demands: economic development Quality/quantity Health issues: water borne diseases Pollution: overuse and salinization Nature of resource debate

11. Nature of resource debate Water as commodity: evaluate costs Supply costs: exploitation, maintenance, investments Opportunity costs Externalities Goal: promote efficiency and avoid "tragedy of commons" type outcome

12. Management problems How to balance equity issues raised by "right to water" approach with efficiency aspects raised by "water as commodity" view?

13. Example: Central Asia

14. A view of the problem Aral Sea 1985 Aral Sea 1997

15. Causes of shrinking Aral Sea Since 19e century, Russia, and later Soviet Union emphasized cash crops: cotton and rice Reduce dependence on imports Acquire hard currency After 1960, consequence of policy was reduction in volume of water flowing to Aral Sea

16. Soviet system Quotas specifying quantities of water available for each region Exchange fossil fuels and energy for water Coordination by central government

17. Present context Water allocation is no longer a domestic issue within a centralized state but has become an international problem New source of conflict

18. Current management structure Almaty Agreement 1992 Based on former Soviet allocation system Creation of interstate commission where decisions taken by consensus Establish quotas Assure their implementation

19. Management problems Maintenance of old Soviet system Not all states accept previous allocation criteria Favors richer downstream countries Enforcement problems: quotas not respected Exchanges between energy and water have been maintained but also not always respected

20. Persisting common good problems Lack of information on quantities really available Thus cannot determine sustainable rate of use Costs of water use not distributed fairly Downstream users of Toktogul (Kyrgyzstan) dam do not contribute to maintenance costs

21. Reaction After independence , Uzbekistan and Kazakstan introduced market prices for gas and coal. Kyrgyzstan couldn't pay: increased electricity production to increase revenues But then the amount of water available for downstream irrigation in Uzbekistan and Kazakstan was also reduced

22. Response 2001: Kyrgyzstan passed law to regulate transborder water use: Water belongs to state Has economic value Kyrgyzstan owns water "created" within it borders Users must pay

23. Water: International efforts Dublin Conference and Rio Summit, 1992 Broad often contradictory principles Slow definition of international water law: UN Convention 1997 on non-navigational uses

24. Relevance of different property regimes to other current environmental issues Confrontation of regimes is occurring South/North Common property characteristics of environmental resources Institutional solutions that adopt common property arrangements

25. Problems: Initial allocations: Equity and efficiency in systems with mixed property regimes • Equity • Owners of fewer private goods should have greater ownership of public good • Efficiency • Criteria to determine number of rights, who receives them and at what price

26. Efficiency, the Environment and Property Rights What is efficiency in economic, social, environmental, and technical terms? Are they equivalent? What is the relation with property rights? Is the problem simple to solve?

27. Efficiency Economic and social efficiency: use resources such that they minimize costs and maximize profits Technical efficiency: minimize inputs with respect to outputs  minimizing energy use The 2 above conditions should not be contradictory If contradiction: not internalized externality, ill defined property rights

28. The Coasian analysis Problem of property rights, efficiency and externalities raised by Coase Argument: What matters is the overall cost and benefit Compensation schemes can be built around this principle It depends who has the biggest loss Issue can be resolved by negotiation All allocations based on Coasian principle by definition optimal

29. What do property rights provide? Demsetz claims that they are an internalization of externalities Adjustment of property rights are an adjustment to externalities Example: forced labor Property rights originate under scarcities in particular environmental scarcities

30. Problems raised by Dasgupta and Heal Property rights are not created in a vacuum Problem often comes from partially defined property rights Coase and Demsetz assume symmetry which might not exist They implicitly assume unique equilibrium Problem: Multiple equilibria

31. Multiple equilibria

32. Solutions In these cases, solutions have to be revealed to producers Sometimes solutions have to be imposed