Appropriative Water Rights and the Efficient Allocation of Resources

Abstract

This paper investigates the allocative efficiency of the appropriative system of water rights, within the-context of a simplified model of a water using industry. At a long run competitive equilibrium for the industry and with a prohibition on the transfer of water rights among firms, it is shown that: (1) senior appropriators claim and use more water than junior appropriators; (2) senior appropriators bear less risk than junior appropriators; (3) the allocation of water and diversion capacitie-6among firms is inefficient, being dominated by an equal sharing among firms. The equal sharing allocation, which is Pareto optimal when diversion capacities are supplied by a competitive leasing industry, can be achieved under the appropriative system if there are competitive markets in water rights and in leases for the use of diversion capacities, an application of the Coase theorem.