Water Externalities: Tragedy of the Common Canal

[Acknowledgment]

We wish to thank Claudia Antonacci, Andrew Barr, Rachel Blank, Anna Draganova, Stephanie Lawrence, Ricky Sahu, and Sara St. Hilaire for research assistance. We also received helpful comments from Ben Cohen, Lee Coppock, William Shobe, Nicholas Smith, and Ilya Zlatkin. This research was funded in part by the National Science Foundation (SES0098400) and the University of Virginia Bankard Fund.

1. Introduction

Few economic insights are as celebrated or bemoaned as the tragedy of the commons. Interest stems from the large number of important natural and manmade resources with common-pool characteristics: that is, resources that are rivalrous , so that appropriation by any one user depletes the overall stock of resource available to other users, and nonexcludable , so that it is difficult or impossible for any one user to prevent another from appropriating a portion of the resource. The tragedy of common-pool resources is allocative inefficiency. Acting in their own self-interest, users tend to overexploit such resources, failing to limit appropriation to efficient levels, and failing to direct appropriation to the most efficient users.

An interesting special case of commons problems arises when resource availability follows a unidirectional flow, such that users make appropriation decisions in sequence. Examples include cumulative contributions to air pollution in persistent jet streams, the harvest of migratory fish populations, and the irrigation decisions of farmers located along a shared canal. The distinguishing feature of these common-pool resource problems is that the external cost of resource exploitation is only felt by users "downstream" of the appropriator. Sequential extraction commons problems may be especially painful when the value of exploitation is negatively related to the order of appropriation. An example is when favorable growing conditions mean field irrigation is more productive for downstream farmers, but upstream farmers exploit their positional advantage by overappropriating the available water resource in irrigating their less productive fields. For example, Ostrom and Gardner (1993) describe the Thambesi water system, where "headlanders" have established first-priority water rights against those downstream. Overuse of water by the Thambesi "headlanders" during the pre-monsoon season results in an aggregate irrigation of fields...