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<br />i <br /> <br />An Overview of the Basin's Resource-Management Problems <br /> <br />....' <br />~~i; <br /> <br />measuring the current resource-management and allocation system against <br />alternatives. Some ofthe major elements of the relevant evidence include: <br /> <br /> <br />-'.-. <br /> <br />a. Prevailing Prices Don't Tell the Economic Truth.-Under the ideal, <br />competitive-market conditions that generally serve as the basis for the <br />American economy, prices playa special role. The prevailing prices for a <br />resource signal the degree of scarcity for the resource and encourage its <br />efficient allocation. A scarce resource is used efficiently when it is used in <br />the manner that yields the highest-value bundle of goods and services for <br />society. Ifit is used for one use rather than for higher-value alternatives, <br />then the outcome is inefficient and the overall economic well-being of society <br />is lower than it could be. If the prevailing prices for the Basin's water and <br />related resources resembled the competitive-market ideal any owner of a <br />resource readily could determine if a would-be buyer values the resource <br />more highly than she does and, if so, relinquish ownership in exchange for <br />compensation. Numerous arm's-length transactions would yield an <br />equilibrium market price and ensure that, at the margin, this price equals <br />both the amount potential buyers are willing to pay to acquire the resource <br />and the amount potential sellers are willing to accept as compensation to be <br />deprived of the resource. <br /> <br />" ; <br /> <br />';ii" <br />~ <br /> <br />:-j <br /> <br />.,: <br />. <br /> <br />For most, if not all, of the water and related resources of the Upper Rio <br />Grande Basin, the market does not work at all efficiently and prevailing <br />prices do not tell the economic truth about either the overall scarcity of the <br />resources or the strength of one demand relative to another. There are few <br />arm's-length transactions. Resource users generally do not pay compensa- <br />tion to those who are deprived of its use, and many water users pay nothing <br />for the resource, per se.3 That is, the price they pay to use the resource is <br />independent of the degree of scarcity. In some cases they have free access to <br />the resource, as when a rancher allows cattle to drink water from a stream <br />that passes through his property, a city resident strolls along a stream <br /> <br />: " <br /> <br />:;:" <br /> <br />3 The initial appropriators of water paid nothing for the water, per se, and the holder of a <br />water right similarly pays nothing when the value of that right increases. When someone <br />purchases water rights, however, we reasonably can conclude that he has paid something for <br />his use of the resource, as when a farmer pays more to buy land with appurtenant water <br />rights than for similar land without, or a rancher pays more to rent a pasture that has stream <br />watsr than for one that does not. Also, city water users pay something for the water when a <br />city purchases a water right from a farmer and folds this cost into municipal water rates. <br />One should not, however, read too much into these examples. If pricing mechanisms were <br />functioning in the Basin, ODe would see evidence of higher prices during dry years, when water <br />is more scarce, and lower during wet years. <br /> <br />. , 1'\ ("l r: ,., <br />\.J .. :; ~.)( <br /> <br />77 <br />