If you wanted to design a property rights regime that guaranteed the waste of a scarce resource, you could hardly do better than Western water law's doctrine of prior appropriation. It requires rights holders to put water to "beneficial use" or forfeit the right. The result is a textbook perverse incentive: a farmer who irrigates more efficiently risks losing the conserved portion of her right, so the private return to conservation is negative even when the social return is enormous.
Oregon shows the incentive is a policy choice, not a law of nature. Its 1987 Instream Water Right Act made instream flow a beneficial use, and on the Deschutes, conservancies now lease and buy water for the river. But legalizing the trade didn't create a liquid market. Rights are mostly held by irrigation districts rather than individual farmers, so every deal needs board approval, and transaction costs run high: quantifying how much water actually reaches crops through leaky, century-old canals is expensive, and farmers still fear that proving they can conserve invites a challenge to their right down the road.
Scale up to the Colorado River and states play the same game. If an Upper Basin state conserves, the saved water flows downstream to be consumed by someone else—and lower use risks becoming the baseline for future cuts. So the feds pay farmers billions to fallow fields—a costly subsidy papering over perverse incentives, year by year.
BOTTOM LINE: any rule tying an asset's ownership to its continuous consumption—budget lines that vanish if unspent, headcount that shrinks if unfilled—will be consumed regardless of value.
