Is the promise of Coase fulfilled?

Andrew Plantinga
Photo of a farm

here is abundant evidence that common-pool resources – from forests to fish to water – will tend to be over exploited if left unmanaged. In “The Problem of Social Cost,” Ronald Coase proposed that property rights could solve this “tragedy of the commons.” If users are given rights to the resource, they reap the rewards of conservation, and over exploitation can be avoided. In the decades since the publication of Coase’s famous paper, economists have clarified the conditions under which property rights lead to efficient use of the resource.

Despite progress on the theory, there is surprisingly little empirical evidence that property rights are effective in practice, especially for natural resources. In part, this is because rights regimes have not been widely adopted. For example, only 8% of groundwater aquifers in water-scarce California are managed with property rights. Another reason is that it’s difficult to determine convincingly if property rights are working well. Rights are often adopted after a resource has been over exploited and so comparisons of resources with and without rights are likely to be misleading.

A new study by emLab economists (Lead Scientists Kyle Meng and Andrew Plantinga and Collaborator Andrew Ayres) takes advantage of a natural experiment to measure the gains from adopting property rights for groundwater in California (the study, recently issued as an NBER working paper, is available here). The Mojave aquifer is one of the largest in California and, like many aquifers in the State, was historically unmanaged and over exploited for agricultural production. That changed in the early 1990s when a system of tradable groundwater rights was adopted. However, when the property rights boundary was drawn, some overlying landowners were left out. This created two groups of landowners: one group with property rights to groundwater and another who continued to have unrestricted access to the aquifer.

Are the landowners with property rights better off than the open access landowners? On the one hand, the rights holders are restricted in how much they can pump, which makes them worse off than the open access users. On the other hand, rights holders can sell their water to users who value it more. In the Mojave case, farmers who received groundwater rights also got the option of selling water to cities, whereas farmers without rights could only pump water to grow crops on their land. Many rights holders also benefited from a higher water table, which lowered their pumping costs.  

To measure the net gain to landowners, we calculated the difference between land prices just inside the property rights boundary and prices just outside, which we show is a lower bound on the total net benefit of the Mojave regime. We find a substantial gain for rights holders and evidence that it comes from the opportunity to sell water to urban users. Our estimates indicate that the gain from the rights regime exceeds $477 million, corresponding to more than a 53% increase in value for rights holders. California adopted the Sustainable Groundwater Management Act in 2014 to promote better management of its groundwater resources. Our study suggests that property rights could be a promising approach.

Read more about the policy implications in the next emLab blog, "A rights-based approach to cooperation and coordination under the sustainable groundwater management act."

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Andrew is the Director of emLab’s Land and Freshwater Program and Professor of Resource Economics and Policy in the Bren School.

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