Reference no: EM132415542
Problem:
Water Rights. Consider the following passage from the textbook (Cooter and Ulen, pp. 149-150):
Centuries ago in England, the general rule [on water rights] was that rights were vested in the "riparian owner," that is, in the person who owned the land on the bank of the river. The riparian owners principal right was to a flow of water past his land. It would be a violation of someone elses rights for an upstream user to use the water that passed by his property in such a way as to reduce the flow to downstream users. The upstream user could not, therefore, divert so much of the water to his own use that the flow was significantly diminished for those downstream. A riparian was restricted in his ability to sell water to nonriparians (i.e., people who do not own land along the water). However, in the 19th century, this legal arrangement had to be altered because industrial demand on the natural flow of a river frequently exceeded the supply. In the eastern United States, these issues were resolved by elaborating the natural-flow theory of water rights that had been adopted from the English common law. An alternative theory of water rights appeared in the western United States. Under the reasonable-use theory, the riparian owner is entitled to use the water flow in any reasonable way. It was deemed reasonable for one owner to use all of the water in a stream or lake when others are making no use of it. Under the reasonable-use theory, a riparian owner does not have a right to the natural water flow. Furthermore, a riparian owner may transfer rights to nonriparians.
Required:
a) Explain why a rule which worked perfectly well in pre-industrial England might have been insufficient after the industrial revolution.
b) Coase would say that, when bargaining costs are low, the initial allocation of property rights does not affect efficiency. Is that the only difference between the natural-flow and reasonable-use theories? Does the law seem to be evolving in the direction of greater efficiency?