Lesson 4: Water Law – The ‘Rules of the Game’ Matter

 download EWE Lesson 4 (.doc file)


  • Incentives
  • Institutions
  • Property rights
  • Voluntary Exchange

Content Standards:

Standard 4:  People respond predictably to positive and negative incentives.

Standard 5:  Voluntary exchange occurs only when all participating parties expect to gain.

Standard 10:   Institutions evolve in market economies to help individuals and groups accomplish their goals. . . . [One] kind of institution, clearly defined and well-enforced property rights, is essential to a market economy.

Teacher Background

Sometimes competition for the use of water becomes an emotion-laden public issue. Accusations of greed or selfishness take the place of civil discourse and problem solving. Economic reasoning suggests the possibility that water conflicts may result from the institutional “rules of the game” rather than from the character of the individuals involved in the dispute. By focusing on how to define property rights to facilitate exchange, economists and entrepreneurs are finding that changing institutional arrangements can open up the possibility of win-win solutions to water disputes.

In Lesson 3, students learned that when property rights to water are clear and the law allows water transfers without loss of right, people trade. Students continue to investigate the institutional parameters of competition for water by studying the formal definitions of water rights in American history as the law evolved to accommodate changing wants and needs. Using real-world examples, they consider how different legal structures affect the ability of citizens to resolve disputes amicably, and they learn how government can play a role in promoting mutually beneficial resolutions of environmental disputes. In the process, they confront the costs and benefits of various alternatives and begin to clarify their own positions on water rights issues.

Overview of U.S. Water Law

Key Feature

Riparian Common Law


reasonable use


what’s reasonable?


Prior Appropriation

(1st in time, 1st in right)




no limits

diversion required

no in-stream use


Forfeiture Law



no ownership without use

permanent loss


no incentive to conserve


Salvaged Water Rule


no right to saved water

no incentive to conservecannot transfer

Beneficial Use

 decisions about valuable uses made in political arena  



Public Interest

transfer rights restricted

political modification of existing rights

no incentive to conserve-inconsistent

Beginning in the late 20th century, conflicts over water use took on a new dimension in response to Americans’ demand for recreational and environmental uses of water. These “in-stream” uses challenge the traditional notion that “beneficial” uses require rights-holders to divert water to establish and maintain their claims. Until very recently, state definitions of “beneficial private use” excluded in-stream flows. Within that institutional framework, a rights holder who chooses not to divert water, leaving it in the stream for fish or rafting, for example, lost his water right. The cost to the rights-holder, perhaps a farmer, of making a generous or principled gesture, or even of taking a one-time payment for his water one year, was losing his claim to water in the future. On the other side, environmentalists and recreational users of water were caught, too; one of their options – purchasing the water they value – had been eliminated by the law. Not surprisingly, they come to see the farmers as enemies to be fought in the courts and through public opinion. (See Free Market Environ­mentalism, p. 74.) Within the last two decades, however, some western states changed water laws to clarify definition of rights and to permit legal transfers, and they are finding that win-win solutions are not only possible but increasingly likely. The agreement between Idaho farmer Mike Hensley and the Idaho Department of Water Resources is only one of a growing number of examples.

A 2.2 mile reach of Pole Creek, a tributary to the Salmon River, and spawning habitat for three threatened species of fish, was dewatered on a regular basis during the late 20th century. Rights-holders diverted water from the creek for irrigation and a hydropower system. In low water years the creek ran dry or became so shallow that Chinook salmon, steelhead, and bull trout – all endangered species – could not migrate to their spawning grounds. Stranded by the low water, they would overheat and die. Chinook salmon were essentially eliminated from Pole Creek above the diversion point. Alternative energy sources that leave water in-steam were available but costly to rights-holders, the farmers and ranchers who were often accused of being greedy and disdainful to environmental quality. When the full context of the problem is examined, however, those accusations look seriously misplaced, especially in light of agreements made possible by changes in Idaho water law.

In 1992, Idaho water law was revised to allow the Idaho Department of Water Resources (IDWA) and the Bureau of Reclamation to lease or buy water from existing rights-holders for the purpose of maintaining in-stream flows. Changing the definition of beneficial use to include in-stream flows changed the incentives for current and prospective water users to cooperate through voluntary exchange. In 2006, Pole Creek water rights holder and farmer, Mike Henslee, committed to a five year water diversion reduction agreement with the Columbia Basin Water Transactions Program (CBWTP) and the IDWR. (Scarborough and Lund 2007). Under the negotiated agreement, Henslee guarantees a minimum creek flow of 5 cubic feet per second; enough to maintain sufficient water for fish to move between the lower and upper reach of the creek. In return, the CBWTP purchased a diesel generator for Henslee as an alternative to the hydropower he uses to run his center-pivot irrigation system. Before starting irrigation in the morning, Henslee checks water flow in the creek, and if it is too low, he switches from hydropower to the diesel generator. Through the agreement, he is compensated for the water left in-stream. Thus, he can maintain his water right while also realizing the value of alternative water use, a win-win solution made possible by rules of the game that allow legal transfer. (See CBWTP.org for additional water negotiations that have been made possible with the legal transfer of water rights.)

Clearly defined, transferable property rights help us to establish the value of water for different uses and to different users. In­stead of just insisting that his water was worth “a lot” to him, Rocky Webb, who irrigated his fields with water from the Deschutes River, an important steelhead spawning stream, could quantify the value of the water. It was worth a crop of hay—about $6,600. Supporters of steelhead recovery who made donations to the Oregon Water Trust could then consider whether water for the steelhead was worth (at least) $6,600 to them as well, and the OWT paid Webb to forego irrigation and leave the water in the stream for the fish. Would the water have been worth $10,000? Or $20,000 to the environmentalists? Would they be willing to pay Webb more? Possibly. Or perhaps, Rocky Webb is concerned about the steel-head as well. In that case, he might be willing to accept less than $6,600. The offer to trade causes people to declare the value they place on water and prompts them to decide what they would be willing to give up in order to have it.

In recent years, environmental economists have focused attention on how changes to property rights laws can increase the likelihood of win-win out­comes in disputes among competing users of water. The success of experiments in water marketing, for example, has reconfirmed what the history of water conflict in the U.S. taught us – that the institutional framework of rules and laws that we adopt to order our lives is more important to final outcomes than are the predispositions and preferences of specific individuals.

Amended water law and clarification of property rights in many west­ern states—notably Montana, Oregon, Colorado, California, Nevada—have opened the door to cooperative agreements between farmers and ranchers on the one hand, and conservationists and recreation enthusiasts on the other. Enviro-capitalists, individuals and companies that enhance the environment through entrepreneurial behavior, have helped along the way:

Enviro-capitalist Zach Willey championed legal reforms to allow water market­ing and helped broker a deal that enhanced instream flows necessary for restoration of salmon populations. From the outset, Willey recognized that the western water rule of “use it or lose it” was part of the problem, because “Holders of water rights are often not al­lowed to resell their rights to others willing to buy them….” Working with the Bonneville Power Administration (BPA), the federal power-marketing authority in the Pacific Northwest, Willey helped design a deal that to pro­vide between 25,000 and 50,000 acre-feet of additional instream flows, the single largest water transfer from out-of-stream to instream flows in the Northwest…. Power compa­nies and the BPA will hold the water behind dams for release at times when salmon need it and when it can produce valu­able electricity. (Anderson & Leal, 1997, pp. 93-94)

The Newlands Project dammed the Truckee and Carson Rivers and diverted water to irrigate the Lahontan Val­ley, but in the 1980s, the Stillwater National Wildlife Refuge wetlands began to dry up. The 100,000-acre wetlands shrank to 7,000 polluted acres. “Once a haven for millions of waterfowl and fish, the wetlands became an ecological disas­ter when 7 million fish died in 1987, and waterfowl popula­tions plummeted to 40 percent of the normal levels.

[Fortunately,] Nevada water law allowed the Nature Conservancy to try to solve the problem in a way that encouraged cooperation between farmers and environ­mentalists. The conservancy set a goal of purchasing 20,000 acre-feet of water by 1993…. The first purchase came from Fallon, Nevada, farmer Mike Casey, who received more than $135,000 for water rights used on his 150 acres of farmland.” (Anderson & Leal, 1997, pp. 92-97)

As these real-world examples illustrate, the framework of property rights helps to determine how we use water and—perhaps more importantly—whether our competition over scarce resources like water will be resolved amicably or will breed hostility and discord.

This lesson engages students in a role play activity in which different historical configurations of water-rights law shape the potential for win-win solutions to disputes. Then, in a simulated conflict between fishermen and farmers over water in a stream, they experience the benefits of institutions that facilitate voluntary exchange. As these real-world examples illustrate, the framework of property rights helps to determine how we use water and—perhaps more importantly—whether our competition over scarce resources like water will be resolved amicably or will breed hostility and discord.  

Activity 4a:  The Impact of Water Law on People’s Choices

Activity 4b:  Fishermen and Farmers

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