Free Market Environmentalism and Adapting to Drought in the American West
The New York Times Endorses the Coase Theorem!
Today’s New York Times features a great OP-ED piece by Nicholas Kristof on the topic of using well defined property rights to water and water trades to reduce the adaptation costs to drought in the American West. Here is a quote from his piece;
John Lennon and Yoko Ono recorded their song “Imagine”. Imagine an adaption sequel. Imagine if farmers in the American West who have the property rights to use water for Almonds and Alfalfa could be granted permanent property rights to these resources regardless if they farm or not. The Coase Theorem teaches us that under certain cases the initial allocation of property rights has no bearing on what is the efficient use of resources. These farmers would now have an incentive to consider the opportunity cost of their using increasingly scarce water for relatively low value added crops when instead they could sell the water to growing cities. The adaptation challenge would quickly vanish and the gains to trade would occur. Yes, the supply of almonds grown would decline and the price would rise but this is a 2nd order effect. I love California almonds but I can substitute to other fibers and nuts and so can you.
Read up on Arizona’s production of alfalfa. This is a water intensive crop. Less of this stuff would be grown if farmers have alternative options for what they do with their water. If we allow markets to perform their core functions, then we can more cheaply adapt to climate change. This was the theme of my 2021 Adapting to Climate Change book. You can also read our NBER paper.
A key issue that policy makers and social scientists need to study pertains to when does political reform occur? As climate risk increases, when does public subsidies for living in fire and flood zones fade out? When do property rights get enforced? When do prices no longer face artificial price ceilings created by well intentioned governments?
The Nobel Laureate Gary Becker argued that as the inefficiency of status quo policies increases that reform occurs. In the case of muffled price signals related to climate change, was he right?
These common sense changes to bring water under the steady hand of capitalism have nothing to do with climate change. Proper pricing of oil has long been advocated to match the unintended consequences, why not water?
I think you should say something about the role of the Saudis pumping unlimited amounts of water for the alfalfa that they then export.