I'm all for water trading in times of water restrictions, or any time really. The sale of marketable water rights is a simple way to efficiently allocate scarce water. But what if the water rights being sold were obtained at a discount--from the government?
With water becoming increasingly precious in California, a rising number of farmers figure they can make more money by selling their water than by actually growing something.
Because farmers get their water at subsidized rates, some of them see financial opportunity this year in selling their allotments to Los Angeles and other desperately thirsty cities across Southern California, as well as to other farms.
Like I said, I'm not against the sale of the allotments. But the current problem was at least partially caused by the subsidized water allotments. With the subsidies, water is over allocated to farmers. Now a quantity constraint leads to the discounted asset becoming more valuable to farmers. What's the rational farmer to do?
This sounds an awful lot like the debate over permit allocation in the carbon cap and trade debate. The government hands producers an asset at a discount (carbon permits) then allows them to sell at the market price. When market prices rise, the producer receives a windfall.
The difference, though, is in the case of carbon, cap and trade is designed to correct a market failure--no scarcity of carbon. In the case of water, scarcity already exists. Efficient water pricing would result in a better allocation of water. Subsidizing water to farmers increases farm profits, but creates an inefficient allocation of water.
