Transcript Rent, Water, and Common Property

Miscellany
Shrimp and turtle excluding
devices
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Review of GATT restriction:
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“Shrimp-Turtle”:
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“Governments may impose regulations on imports comparable to
those imposed on domestic goods regarding their physical
characteristics and performance, but not regarding how products
are produced, if those methods have no effect on product
characteristics or performance”
Legal challenge to GATT restriction in which the US was permitted
to embargo shrimp caught without sea-turtle excluding devices
Why did it succeed?
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GATT allows for 2 exceptions:
1.
2.
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Necessary to protect plant life or human or animal health
Conservation of exhaustible resources
Lawsuit argued that shrimp are largely in the global commons – on
those grounds it succeeded.
MB and MEC
$/Q
D
MSC
MPC
MEC
Q
$/Q
Net MB=D-MPC
MEC
Q*
Q
Some final exam hints
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Exam is open everything
3 hours allocated
Practice exam distributed Thursday
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Same structure
2/3 will be same topics
1 extra credit challenge problem
Covers whole course - emphasis on
later material
Rent, Land, & Water,
How is value determined for natural
resources? Prices?
Example: Grape Prices &
Oaks
High grape prices in 2000 caused conversion
of oak woodland to grape production. Why?
 Who gains or loses from an increase or
decrease in grape prices?
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Winemakers?
 Landowners?
 Consumers?
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What are the consequences for oaks of price
change in grapes?
Concepts of “rent”
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Contract rent: payment by tenant for right to use owner’s property—
not the concept of rent we use here
 Apartment
Economic or scarcity rent: payment to a fixed factor above
competitive rate of return (payment for a good in excess of its cost of
provision), usually due to scarcity
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Fertile agricultural land (costs nothing to provide)
Jennifer Aniston
Nobel Prize winning professors
Exhaustible resources
Quasi-rent: Short-run profits that are competed away over time.
 New Nat’l Forest policy increases logging—temporarily benefits
current loggers
What determines the value of
land?
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Land values have two components
“Return” from productive activities (like
growing grapes) -- rent
 Speculative component – discounted
value of expected use in the future
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• Eg, may expect demand for housing in 50
years
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Take a closer look at rent and return
Example: “Return” to Ag Land
Have 1000 acres of land, best used for growing strawberries
Price of
Strawberries
Demand
Return to Land = RL
Marg Cost
Supply
Bushels of Strawberries
Return to land is rent – surplus accruing to factors in short supply
What determines the price of
ag land?
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Assume no speculative component
Price of land: PL
Annual returns to land: RL
Interest rate on similar assets: i
Arbitrage condition: PL=RL/i
In other words
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Typical returns to assets must equal income
land value is net present value of future returns
Example: an acre generates $100 of return
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Assume 5% interest/discount rate
Land price = 100/0.05=$2,000
Back to original example of grapes
Effect of price change on oaks
3 different farms (types of land)-A, B, C
 1000 acres of each type
 With $1000 in inputs can produce
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A: 500 bushels [cost = $2.00/bushel]
 B: 400 bushels [cost = $2.50/bushel]
 C: 250 bushels [cost = $4.00/bushel]
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Current price $2.00/bushel
Who gains from 2x price
increase?
RentB=600
$/bushel
RentC=0
RentA=1000
4.00
New Price
Farm A: gains $1000
Farm B: gains $600
Farm C: break even
Oaks (on B&C): lose
2.50
2.00
Old Price
What is the rent at the old
Price of $2 a bushel?
500
900
1150
Bushels
Observe:
All grapes sell at the same price
 Better land fetches higher rents
 Marginal land fetches little
 Inframarginal lands garner “Ricardian
Rents”
 QUESTION: If price drops, what
farmer goes out of business? Value
of loss?
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Value of land for housing
1. Returns to land for housing (per year)
$/acre
Price per
Year
Supply of land
Demand for housing
Acres
2. Value of asset – one acre of land =
Net Present Value of Stream of Returns from housing
(May well increase over time.)
OR
Returns today plus discounted expected value tomorrow.
Summary for land
Land is in limited supply, of different levels of
quality and in different locations (some more
convenient than others)
 Land value consists of
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NPV of stream of returns (eg, strawberries or
housing services)
May contain speculative component due to
future value
The economics of water
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Allocation: balance between many users
and limited resource:
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Consumptive uses (residential, industrial,
agricultural)
Non-consumptive uses (fisheries,
recreational, hydro-electric power,
transportation)
Water prices
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Typically depend on user
Typically average cost priced
Consumptive users in US
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Irrigation: 39%
Thermo-electric power: 39%
Public supply: 12%
Industry: 6%
Livestock: 1%
Home: 1%
Mining: 1%
Commercial: 1%
Top 3 agricultural users
State
% flood
% spray
% drip
California
Acres
(‘000)
9,480
74%
19%
7%
Nebraska
7,450
47%
53%
0%
Texas
6,310
56%
43%
1%
Agricultural vs. municipal
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Agricultural water heavily subsidized
Price ~ $20/AF, use 80% water in California
 Marginal cost to supply ~ $1000/AF
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Municipal water
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Price ~ $300/AF
Groundwater
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Largely unregulated, “open access”
resource, few property rights, difficult to
enforce pumping laws
Inefficiencies in water supply &
implications
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Ex: Lake Cachuma and State Water -Rents go to inframarginal sources
Marg Cost
State Water
PB
Demand B
PA
Rent,
Demand A
Lake Cachuma
Demand A
Quantity of Water
Price is associated with marginal source
Average Cost Pricing –
inefficient
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Government agencies and regulated monopolists often required to price
to yield zero profits
Price = (Total costs)/quantity
With Avg Cost Pricing, state water (too much consumption)
With efficient pricing, no state water
Marg Cost
State Water
Average Costs
Lake Cachuma
Too much water
Demand A
Quantity of Water
Examples
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What happens when parking at UCSB is
average cost priced?
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Hint: Marginal costs are
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Limited number of parking lot spaces
Extra spaces can only be provided with
parking garages
Lots: $100/space/year
Parking Garages: $4000/space/year
What is efficient policy?
The Central Valley Project
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The CVP carries water from Northern CA to
southern CA. Water rights for CVP water
follow the land that gets the water, not the
owner (ie, not severable).
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Which landowners gain from CVP?
Who gains from CVP?
Landowners that purchased property
prior to CVP gain.
 Prior purchase price of land did not
“capitalize” the CVP water right.
 Future price will capitalize that right.
 Rent accrues to property that will
obtain rights to CVP water.
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Imperial Valley/San Diego
High profile water transfer proposed from
Imperial Valley to San Diego
 Imperial Valley
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Desert, agricultural, poorest county in CA
 Vast water rights
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San Diego
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One of richest, largely municipal, high
marginal value for water.
The economics of water
transfer
What does economics have to say
about water transfer from agricultural
uses to municipal uses?
 Allocate a fixed amount of water
between the 2 uses.
 How do we know when allocation is
efficient?
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Equi-marginal principle
Efficient allocation
$ (U)
San Diego willing
to pay this for 1st AF
$1000
$ (A)
Imp. Valley willing
to sell 1st AF for this
DA
$50
DU
U0
U: 0%
A: 100% A0
100%
0%
Did they reach agreement?
Different marginal values should lead to
large incentives for trade
 Imperial Valley was going to sell about 5% of
water allocation to San Diego at price of
around $300/AF.
 Deal broke down initially (2002)
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Concerns over agricultural labor & way of life
Feds intervened by cutting back IV water
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Deal struck in Fall, 2003
California & the Colorado R.
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7 states draw from Colorado:
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Arizona, Colorado, California, New Mexico,
Utah, Wyoming, and Nevada
Dept. of Interior: CA has not lived up to
sharing & conservation obligations
Saw Imperial Valley transfer as good thing
 If no deal, slash CA entitlement from 5.2
MAF/yr to 4.4 MAF/yr.
 Jan 1, entitlement reduced.
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Allocation by prior appropriation
Prior Appropriations: “First in time, first in
use”
 Economists criticize open access systems
because they lack specified property rights.
“Prior appropriations” gives property rights to
agricultural users. Is this an efficient way to
allocate water between 2 consumptive
users?
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“Prior appropriations”
Price
Urban Supply
(S-QA)
Ag users get first dibs,
consume QAg units of water
at price PAa. Urban buys QUrb
at price PUrb. PAa< PUrb so
equi-marginal principle fails.
Supply
PUrb
P*
PAg
DUrb
QUrb
DAg
QAgQ*
DTotal
Water