Paul Milgrom on auctions for water rights

 ZME Science (in Romania) interviews Paul Milgrom about water shortages (in California):

Could auctions help California make better use of its water? This leading economist believes so.  by Mihai Andrei  

"“People get confused when they think about auctions, they think about bidding for a piece of art or something like that,” Milgrom told ZME Science in an interview. “What economists mean when we talk about auction is a process of decentralized resource allocation using prices. It means that we’ve got people who have knowledge about what they need and how valuable things are to them, and we take account of that information to allocate resources specifically, we make bids, and those things are converted to determine prices.”

“If you’re not using an auction you either mean you’re not using prices to guide the resource allocation or you’re not using individual bids. If you don’t use that information, you’re gonna have waste.”

"Waste also means opportunity, and the opportunity Milgrom sees would be transferring water use from those who value it less to those who value it more (and are willing to pay more for it).

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“In California, less than 5% of water is reallocated, even in the most severe drought,” Milgrom says

“The prices adjust [water gets more expensive], but the reallocation doesn’t adjust even when there is insufficient water. The prices are responsive, but the value of trade isn’t very responsive. So why doesn’t the market work, and what can we do to fix it?”

“It’s not what you expect in a market. What you would expect in a well-functioning market is that the water allocation would increase more to adapt to sending more water into higher value uses and less water into less-value uses. So we’d expect more trading to go on. The fact that it didn’t suggests there’s a problem with the market.”

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"Designing a large-scale market for water isn’t without precedent. In Australia, a much larger proportion of water is being traded (about 50%); with a roughly similar standard of living, and similar environmental challenges, people in Sydney use about half that amount. But while Australia can serve as an inspiration for California, the same system can’t be replicated exactly.

“We can’t apply the Australian model to California because there are different property rights regimes, the rights are defined differently. They also don’t take into account return flows, which California water law does.”

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"“I’m cautiously optimistic,” Milgrom says, drawing from his experience with auctioning broadcast spectrum space. “Part of what’s making me optimistic that this is the right time is the progress in measurements and hydrological models.”