Volume 22, No.3, Fall 2004

To Trade or Not To Trade

By Daniel K. Benjamin

Every western state limits its citizens’ ability to transfer water rights. Most commonly, although owners of water rights may use water in ways and amounts consonant with historical patterns, they cannot freely sell or lease the rights to that water. Now that the economic value of water is rising rapidly and new uses for water are being developed, such restrictions seem to be classic examples of regulations and laws that waste resources.

Research by Mark Kanazawa (2003) focusing on the history of water law in California suggests, however, that such restrictions were originally devised to sensibly conserve resources. If Kanazawa’s reasoning is applicable to today’s jurists and policy makers, one might reasonably hope that contemporary courts (and even legislatures) will soon look more favorably on allowing water transfers.

Water resides in two forms: as surface water, such as streams, and as groundwater, located under the Earth’s surface, typically in permeable strata such as sandstone. Like many jurisdictions, California sharply limits the sale or other transfer of groundwater "out-of-basin", i.e., from one hydrologic unit (such as an aquifer) to a different one. Kanazawa shows why these restrictions originally were imposed.

Until about 1900, California permitted out-of-basin transfers, basing its policy on long-standing precedents in English common law. Under the principle of ad coelum (literally, "to the sky") water under the ground was considered to be part and parcel of the property above it. Just as the property owner had broad discretion to use the ground, so too did he have broad discretion in his use of groundwater. Beginning in 1903, however, judicial thinking on this matter changed rapidly. Within a few years the California Supreme Court had laid down the sharp limitations on out-of-basin transfers that have since dominated California water policy.

Kanazawa argues that the Court was guided by two forces in deciding to limit groundwater transfers. First, scientific understanding had advanced rapidly in the late nineteenth century. Previously, although it had been acknowledged that removing groundwater could adversely affect the ability of others to make withdrawals from an aquifer, the mechanics and extent of such effects had not been well understood. Hence, courts had been reluctant to restrict a landowner’s ability to use the water under his land. By the end of the century, hydrologists were able to ascertain both the nature and likely extent of the effects elsewhere in a basin due to a withdrawal from any given location. This knowledge gave courts the tool they needed to evaluate the costs that one user might inflict on another and to assess damages and restrict usage accordingly.

In Kanazawa’s view, the second critical development was a series of events that sharply raised the costs that one groundwater user could impose on other users in the same basin. In the 1890s, the number of irrigated farms in southern California doubled and the amount of irrigated acreage rose 43 percent. Moreover, beginning in 1893, southern California experienced a decade of drought, which reduced the supply of surface water. Finally, a contemporaneous series of technological advances in pump technology reduced pumping costs sharply, leading to a rapid increase in the depth and extraction rate of wells.

The reduced supply of surface water and increased irrigation raised the costs imposed on within-basin users of any out-of-basin transfers. And the improved pump technology made it more likely that large-scale pumping for such purposes would take place. Given the courts’ view that the groundwater in a basin was implicitly owned by the basin’s landowners, it became clear that court-mandated transfer restrictions had the potential to benefit landowners, despite the owners’ resultant loss of the right to freely transfer groundwater. Hence, in Kanazawa’s view, the California Supreme Court decided on quite pragmatic (albeit implicit) cost-benefit grounds to restrict such transfers.

The historical developments in California are important because of contemporary developments there and elsewhere. The economic value of water is rising, often because of new uses (such as increased stream flows to enhance trout populations in Oregon) or new users (such as recent emigres to otherwise-arid Las Vegas). When compounded by several years of drought-reduced surface water supplies in the West, these developments suggest that the highest valued users of water today may be outside the basins where groundwater is most plentiful. If so, principles of economic efficiency inform us that the out-of-basin transfers that courts opposed a century ago could today increase, rather than decrease, welfare in exporting basins.

More generally, the changing demands for and supplies of water over the last 20 years both imply that transfer restrictions for surface water or groundwater are well worth reviewing for their equity and efficiency. One can only hope that the willingness of California courts to take into account economic factors early in the twentieth century will be repeated by courts there and elsewhere early in the twenty-first century.


Kanazawa, Mark. 2003. Origins of Common Law Restrictions on Water Transfers: Groundwater in Nineteenth-Century California. Journal of Legal Studies 32(1): 153-80.

Daniel K. Benjamin is a PERC senior associate and professor of economics at Clemson University. His regular column, "Tangents-Where Research and Policy Meet," investigates policy implications of recent academic research. He can be reached at: wahoo@clemson.edu

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