I’m reading a slightly older macroeconomics textbook by Joseph Stiglitz, who won the Nobel Prize in 2001. In talking about market inefficiencies, Stiglitz uses as a case study water rights in the western United States. He points out that cattle ranchers pay relatively little for their water, while municipalities pay considerably more. Since cities are always clamoring for more water, Stiglitz claims that ranchers should be allowed to sell their water rights to municipalities; cities would get the water that they want, and the ranchers would earn more money selling water than they do raising and selling the cattle. The government, which supplies the water, prohibits this sale, however, resulting in a inefficient market.
Is Stiglitz off his nut? Its my understanding that the reason for this price discrepancy in the first place is that water costs to ranchers are subsidized in order to keep the price of beef low for consumers. If the ranchers could sell this water to cities it would be the equivalent of the federal government simply handing them money for nothing. Of course they can’t do this!
The problem with any economic example is there are about 200 interlocking factors in any situation. Stiglitz’ example covers two factors. You add a third. It’s still a caricature of reality, so distorted as to have almost no explanitory power.
Water rights are a very deep area of the law, going back to the 1500s. The basis of the situation lies there.
IANAE and I do not have knowledge of this specific example, but taken in the large this is an example of how government interference distorts the free market, often for the benefit of someone who will help them stay in office but to the detriment of the overall economic system. (Your discussion makes me wonder why the government would want to subsidize beef, but that is beside the point.)
There is an old, dry joke about an engineer and an economist stranded on a desert island with a can of beans. The engineer said, “How can we design and build a can opener?” and the economist said, “Assume a can opener exists.” The joke is that in drawing examples for economic situations, one must assume away the 200 factors that LSLGuy mentions to allow the student to focus on the point of the example.
That’s fairly obvious. Cattle use up large tracts of land in rural areas. The people who get elected from those areas, particularly Senators, wield a lot of power in congress. They represent their constituents by making it afforable for them to continue making a living which allows them to contribute to the politicians political campaign directly (the ranchers and farmers in those areas), and the people who work in the associated industries tend to vote for those who allow them to continue to make a living.
In urban areas these sorts of issues are not as important as others to get elected, so the Cattle Growers lobby or Beef Council or whatever holds relatively more clout.
IOW, politicians tend to pander to their constituencies.