In California there has been an incredibly debilitating drought that has depleted massive amounts of the aboveground water supply. In response to the decreased amount of aboveground water the government of California has done something unprecedented for the state. They have revoked private ownership of underground water supplies. Based on the reasoning that the above and belowground water supplies are all “a single complex, interconnected water supply” the government of California has taken control of the water supply.

            The drought has severely affected the economy of California and the Government is hoping that by taking control of the belowground water supply they can help ensure that the economy and the people of California will be able to manage and sustain their water supply throughout the remainder of the drought. This brings to mind a series of economic issues. First it raises questions referring to the idea of externalities and the Coase Theorem. The people who previously had private ownership of these water sources were pumping as much water out of them as they could sell so they were essentially following market demand to an optimal point. This improper management had the potential for a terrible externality of running out of water in the long run. Now that the government has taken over the water supply and is rationing the amount of water that can be pumped out the quantity supplied is being reduced and there is market inefficiency. This also violates one of the main principles of the Coase theorem that is “strict property rights.” This issue poses two important questions: Could it have been more effective simply for the government to have imposed a tax on the pumping of underground water on its previous owners as opposed to taking the property from them out right or is there some sort of application of the Coase theorem that could have solved the problem without taking property away from citizens? And if not then is it always right to let the markets govern themselves?

~Stuart Huston

Sources: http://www.businessweek.com/articles/2014-09-17/drought-plagued-california-stops-treating-groundwater-like-private-property#r=nav-f-story