No Easy Exit: Property Rights, Markets, and Negotiations Over Water

Abstract

The role of water has featured prominently in the Israeli-Palestinian negotiation process, and in Arab-Israeli disputes in general. The allocation or reallocation of water rights is a particularly thorny problem. Recent work (Fisher, 1995) seeks to sidestep the issue of rights allocation by appealing to the Coase theorem, which provides conditions under which the efficient use of a good does not depend on the allocation of property rights. It instead emphasizes the small use value of the water in dispute, and concludes that a trade of "water for peace" should be eminently possible. Here, we provide a critique of this conclusion, based on two central ideas. First, the conditions of the Coase theorem are not satisfied, even approximately, and therefore the valuation of the use of water cannot be analytically separated from the allocation of property rights. Second, the existence of subnational interests, and the need to have an agreement acceptable to important actors at this level, creates a further difficulty for negotiating a resolution of any dispute. Even if a trade at the national level can be agreed upon, domestic losers must be compensated enough to make it politically feasible for the national government.

Keywords: Coase Theorem, Property Rights, Middle East, Water, Conflict

JEL Classification: D23, D74, Q25