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<br />DRAFT <br /> <br />and/or for which the decision-making unit has no legal liability <br /> <br />(and we will argue that such costs exist), then requiring payment <br /> <br /> <br />of compen~ation in the amount of these costs becomes a way of <br /> <br /> <br />being sure that those costs will be taken into account in <br /> <br /> <br />deciding whether or not to undertake the action under consider.- <br /> <br />ation. <br /> <br />Naturally, if the burden of such a liability is to be placed <br /> <br />on would-be transferers, the amount of compensation should be <br /> <br />limited to the costs imposed on the area of origin so that we do <br /> <br />not discourage transfers that yield benefits in excess of costs. <br /> <br />There is a third reason for compensation, a reason that is <br /> <br />related to both economic efficiency of transfers and to equity. <br /> <br />When we carry out a benefit-cost analysis, we add benefits to all <br /> <br />beneficiaries and subtract costs to all cost-bearers, treating a <br /> <br />dollar of benefits or costs as if a dollar meant the same to <br /> <br />everyone. But we have no assurance that this is true: a dollar <br /> <br />may mean much.more to one person than another. <br /> <br />Thus, if we want <br /> <br />to be sure that no one is made worse off by a project, not only <br /> <br />must aggregate benefits exceed aggregate costs, but compensation <br /> <br />in the amount of losses must actually be paid to all losers. <br /> <br />B. Economically Efficient Transbasin Diversions <br /> <br />We start by considering the conditions that must hold if an <br /> <br />out-of-basin transfer project is to be considered desirable from <br /> <br />(I) the transfer must be the least-cost alternative for <br /> <br />I <br />1 <br />1 <br /> <br />al economic point of view. Two conditions are required: <br /> <br />41 <br />