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Unformatted text preview: EEP 101/Econ 125 Professor Zilberman GSIs: Alix, McKim, Schoengold Problem Set #5 Answer Key 1) Assume that there are two types of farmers in a region those who grow cotton, and those who grow roses. Let W denote the applied water. The marginal benefit of water to the cotton growers (for one season) is MB C = 100 (1/5)W. The marginal benefit of water to the rose growers is MB R = 400 2W. Let S denote the amount of water available for the season. S is measured in acre-feet. There are two states of nature in this region high rain (flood) years, and low rain (drought) years. In a flood year, the supply of water is S , and in a drought year, the supply of water is S . Let S = 600, and S = 400. (i) In one or two paragraphs, describe the system of water rights in the United States. How and why did it develop? Discuss the economic efficiency of the system. Water rights in the United States are on what is called a queuing system in the detailed texts. This means that there is a system of assigning rights to certain quantities of water, and that there are regulations defining an order in which those rights can be used. The reason these systems were developed was to entice people to move to and develop new and unsettled land. Without rights to resources like land and water, homesteaders would have been unable to continue moving west. A similar analysis could be applied to the Homestead Act or the Railroad Act, both of which were instrumental in settling the Western United States. The Homestead Act gave land to any person who moved west and worked a piece of land for 5 years, while the Railroad Act gave parcels of land to the railroad companies in exchange for building railroad lines. These rights take the form of either Riparian or Prior Appropriation rights. Riparian rights allow landowners to use surface water on land that is located adjacent to the water body (lakes or rivers for example). These water rights must be used on the land located by the water body. Therefore, these rights cannot be sold separately; they come with the land. Prior Appropriation water rights are based on history. Whoever is the first person to divert water from a river has rights to use that water. These rights are considered senior to any person who later decides to use the water. While these rights are not attached to a particular piece of land (as with Riparian rights), there are often limitations on trade in these water rights. From an economic perspective, these systems are inefficient because water will go to those with historical rights, and not to those who use the water in the most beneficial manner. For the following questions, be sure to show your work....
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- Spring '07