A River Runs Through It

Water is an interesting commodity. It is essential for human life, but less expensive than diamonds. Two thirds of the planet is covered with it and it is short supply. And almost everywhere, the ownership of water is not well defined. The first issue was dealt with by Adam Smith. The second has something to do with the difference between fresh water and salt water. The third has caused a lawsuit between Wyoming and Montana (and more strange comments from Sarah Palin). Stories can be found at Billings Gazette and CBS-Sacramento.

At issue is water that flows from the Big Horn Mountains of Wyoming, into the Tongue and Powder Rivers, through Montana where they join the Yellowstone River then the Missouri and Mississippi, before finally emptying into the Gulf of Mexico. The water is a common property, meaning there is no well-defined property right. If the people of Wyoming use the water, they impose a negative externality on their downstream neighbours. The Coase Theorem suggests that there is a market solution to such a problem.

In the case of Wyoming and Montana, Wyoming benefits from taking water out of the rivers before it gets to Montana and Montana benefits from Wyoming not taking water from the rivers. This suggests that Wyoming would be willing to compensate Montana for water it takes, and also suggests that Montana would be willing to compensate Wyoming for not taking water out of the rivers. Alternatively, the two states could negotiate a contract that stipulates how much water Wyoming can take from the rivers before it reaches Montana. This is exactly what happened in 1950 when the two states, along with North Dakota, signed the Yellowstone Compact allocating water rights.

Like so many agreements, however, the potential for technological change was not considered. In the 1950’s irrigation involved flooding fields. A large portion of the water used drained back into the river systems and was available for downstream use. The development of new technologies have reduced the amount of water required per acre of farmland and thus increased the net amount of water taken from the rivers, though not the gross amount. This was the issue of the lawsuit. The court found that the original agreement referred to gross, not net amounts and found in favour of Wyoming.

Having lost the case, Montana must now renegotiate with Wyoming for water and again, there is a market solution to the problem. Expect to see more of this type of litigation in the future where water rights are not well defined in a world of changing technology.

Sarah Palin's comments are the same issue, but between competing users in the same state.