Ronald C. Griffin

Agricultural Runoff as a Nonpoint Externality: A Theoretical Development

The purpose of this paper is to develop and explore a theory dealing with an important facet of agricultural runoff problems. Agricultural runoff is a nonpoint externality with notable implications for both research and policy. A nonpoint externality exists whenever the externality contributions of individual economic agents cannot be practically measured by direct monitoring. Without monitoring, regulations on emissions cannot be enforced, and charges or subsidies cannot be assessed. Thus, policies which are usually suggested for pollution abatement are not available. There is great need for a theoretical base that can adequately capture these facts. Such a theory yields some important implications even before specific empirical applications. The economic problem of agricultural runoff can be separated into three distinct categories. First, the sediment, nutrients, and chemicals removed by runoff represent a loss of resources to the individual farmer. These costs are borne privately by farmers. Second, if the discount rate of the individual farmer is greater than the social discount rate, or if the farmer has a planning horizon which is shorter than societys, the farmer will mine the soil resource at a rate which is more depletive than is socially optimal. This is a temporal externality. A third category involves the conservation of mass. Physical resources lost by the individual farm must appear elsewhere in the environment. In sufficient quantities, these resources are pollutants. Since water is the primary transport media for these resources, it is water that is polluted by soil, nutrients, and agricultural chemicals. This spatial externality has been the focus of much research. Here we intend to develop a theory for these issues, to employ it to suggest a revised research methodology, and to provide some important conclusions about alternative runoff policies. Only two of the three categories of agricultural runoff problems involve externalities, and only the spatial externality is considered here.

Demand Specification for Municipal Water Management: Evaluation of the Stone-Geary Form

To specify demand in most water allocation problems, researchers face a tradeoff between flexibility and parsimony. Flexible forms are less constraining on elasticity estimates, but require large parameter sets that tend to cause poor out-of-sample forecasts and computational difficulties. Using a five-year panel of Texas municipalities, the parsimonious Stone-Geary form yields estimated demand functions that are comparable to flexible form results. The Stone-Geary specification also provides an estimate of the portion of water use that may not be responsive to price, and is useful in analysing price structures and designing conservation policies. (JEL Q25, C23)

Valuing Water Supply Reliability

Instead of creating water supply systems that fully insulate mankind from climate-imposed water deficiencies, it is possible that for municipal water systems a nonzero probability of water supply shortfall is efficient. Perfect water supply reliability, meaning no chance of future shortfall, is not optimal when water development costs are high. Designing an efficient strategy requires an assessment of consumer preferences pertaining to the reliability of water supply. Contingent valuations of both current and future shortfalls are reported. The consistency of these measures is gauged using an expected utility model. Copyright 2000, Oxford University Press.

The Potential for Water Market Efficiency When Instream Flows Have Value

Most of the effort being expended to revise western water policy concerns the maintenance of instream waters to the exclusion of traditional diversionary interests. Absent from the economics literature is a theoretical treatment addressing the interface between diversionary and instream water uses. At issue is the potential for refining market operations to accomplish efficient allocation in the presence of both diversionary and instream uses. Optimization methods are employed to examine this issue in a highly generalized framework. If a specific structure is adopted, markets and other incentive-based policies are demonstrated to be capable of efficient water allocation.

Water marketing as a reallocative institution in Texas

Policy selection for guiding the allocation of water resources has long been debated among economists and policymakers. Economists have been prone to recommend water marketing on theoretical grounds, but the appraisal of realistic opportunities for employing market institutions requires analysis of actual markets. Twenty years of market activity in the Lower Rio Grande Valley of Texas are reviewed along with the historical development of water law in Texas and procedural requirements for transferring water rights. Developed data indicate active water marketing practices with significant volumes of agricultural water having been sold to municipalities. For transactions involving representative cities, estimated municipal benefits from water marketing are determined to far exceed the agricultural costs of the transfer. Attention to the unique circumstances of this region is required prior to extending results to other areas.

Improving the ability of a water market to efficiently manage drought

Some water markets maintain institutional elements that provide allocative advantages to specified water users. In the Lower Rio Grande Valley, water rights are designated as either municipal or agricultural (irrigation), with certain prioritization advantages afforded to municipal accounts. While sales of rights between municipalities and irrigators are allowed, the priority disparity results in a prohibition on leasing between sectors. Concern over meeting future urban demand has led municipalities to purchase rights well in excess of current needs. The inability to lease municipal water to irrigators removes a significant and growing fraction of available water from the market. The additional flexibility provided by leasing provides a valuable tool for managing seasonal drought. In this analysis the justification for prioritized municipal water is investigated. Results indicate that the added security municipalities may derive from higher prioritization during drought is accompanied by economic inefficiencies in regional water allocation. It is argued that eliminating municipal protection and the consequent allowance of intersectoralleasing would contribute to regional well-being at small cost to municipal water users.

The Welfare Analytics of Transaction Costs, Externalities, and Institutional Choice

A natural result of the economists participation in externality literature has been a strong emphasis upon market and price-guided policies. Available theoretical foundations are insufficient for supporting this ideology. Absent is a conceptual framework which integrates institutional options and their attendant resource costs with what we know of resource and technology constraints. This paper addresses this omission by incorporating an explicit role for transaction costs into traditional welfare diagrammatics.

The fundamental principles of cost‐benefit analysis

Cost-benefit analysis is reducible to several major principles that collectively describe the assumption base, objectives, analytical tasks, and merits of this important project assessment methodology. Here, these principles are identified and described using basic economic terms and concepts. The deficiencies of cost-benefit analysis also emerge from these principles, and these issues are also observed in this article. Further discussion investigates high-profile issues in the economic assessment of environmental affects and the economic effects on sectors linked to water-project-impacted sectors. Opposition among the stakeholders of proposed public projects can lead to confusion about what counts in the eco- nomic appraisal of such projects and how counted things are to be economically weighted. This confusion expands the latitude available to juxtaposed stakeholders and widens the breaches over which they contest. The result may be wasted resources and expensive delays for project decisions. Sometimes this problem seems to be confounded by economic analysts who, perhaps in their eagerness to assuage clients, quantify net ben- efits of dubious origin. Nonspecialists are undoubtedly per- plexed by the array of benefits and costs that are claimed; yet better understanding can be obtained only by consulting siz- able texts containing considerable notation and theory. The primary objective of this paper is to clarify these debates by synthesizing modern economic wisdom into the sharpest possible perspective on the proper conduct of cost-benefit analysis (CBA). The presentation strives to rely on basic eco- nomic concepts (such as supply and demand functions). In terms of project analysis, no method other than CBA enjoys as widespread application or analytical power. Cost- benefit analysis has long served as an institutionalized compo- nent of federal decision making for water projects. In addition, the application of cost-benefit analysis to federal policy has been expanded in recent years to include regulatory rule mak- ing of many types, providing additional evidence of CBAs usefulness and power. Indeed, the notion that public policy, like public projects, should offer benefits in excess of costs has been embraced by recent Presidential administrations. Execu- tive Orders 12291 (Federal Register, 46, pp. 13,193-13,198, Feb- mary 19, 1981) and 12866 (Federal Register, 58(190), pp. 51,735-51,744, October 4, 1993) require a formal consider- ation of benefits and costs for proposed regulations by federal agencies. This is not to say that the methodology is without shortcomings, and the second objective of this paper is to identify where important problems may lie. A third objective is to indicate CBAs unresolved and evolving issues, matters for which ongoing investigations may lead to further refinements in the technique. To accomplish these three tasks expeditiously, we begin by reviewing the cost-benefit methodology, proceeding to identify and highlight its central principle. Some additional principles

The Application of Water Market Doctrines in Texas

The State of Texas is the U.S.’s second largest state in terms of land area and it has recently become the second largest state in terms of population (xcU.S. Department of Commerce, 1995). It is hydrologically diverse and, at over 692,000 km2, it is larger than some countries. As a coastal state, some river basins lie fully within the State while other rivers originate in upstream states. Precipitation at Texas’s arid western tip averages 20 cm annually (xcTexas Department of Water Resources, 1984). There, large expanses of land may be too parched to provide forage for livestock, groundwater availability is meager, and the few available surface water supplies are heavily used. Contrarily, at the humid southeastern edge of the State, precipitation averages 142 cm annually (xcTexas Department of Water Resources, 1984). There, water is abundant, rice is an important crop, and flooding is a periodic problem.

Environmental policy for spatial and persistent pollutants

Abstract Traditional economic models of alternative pollution policies notwithstanding, all discharges are persistent to some degree (assimilation is not instantaneous), and their distributions vary spatially. Utilizing an optimal control framework to capture the dynamics of persistence, the efficiency of economic incentives and regulations are juxtaposed when the goal is to obtain arbitrary environmental standards at least social cost. For generality, the considered pollutant is regarded as spatially variant, and standards are allowed to differ among regions. Theoretically optimal policy parameters are derived. As in the case of spatial, nonpersistent discharges, the property of persistance alone is demonstrated to invalidate the typically maintained economic advantage of price-guided policies over regulatory policies.