Governing the Commons: The Evolution of Institutions for Collective Action

The successful CPRs in the previous chapter have existed for hundreds of years. It is thus not possible to understand the incentives around their formation. To address how such institutions are formed, Ostrom studies the management of “groundwater basins located beneath the Los Angeles metropolitan area” (104). In these cases, appropriators rely primarily on negotiated settlements of water rights to change institutional rules. It is important to tackle the issue of origins because creating an institution is also subject to collective action incentives.

In dry Los Angeles, water basins are essential as sources of water and storage units for use during high periods of demand. These groundwater basins can be destroyed by overextraction or pollution, which was a real threat in the mid-20th century. If located near the coast, saltwater can invade and destroy the basin if it gets too low. The destruction of these water basins in the Los Angeles area would have been catastrophic. In the 1940s, there were conflicting laws about rights to this water. 

As a result, the situation in these basins was one of open-access, or one without clear limits as to who could withdraw water and how much could be withdrawn. This situation created incentives for pumpers to “overexploit the resource” (109). It is cheaper to pump when water levels are high and pumpers get access to the water they pump. The overlying landowners were motivated to protect their access to water, yet legal action did not promise them a favorable outcome and was risky. These owners used public venues to impose constraints on all, specifically the threat of judicial decrees.

Located inland, the Raymond Basin was protected from salt-water intrusion and was small. The city of Pasadena, California, was by far the largest producer of water for the Basin and replenished it for years. However, in the 1930s, the city decided to stop taking actions that primarily benefited others and initiated legal action against other producers (i.e., those who perform maintenance work on the CPR). The city believed that others were not doing their fair share of maintenance work. The case was first referred to the California Department of Public Works for a geologic study. That study found that annual withdrawals from the Basin exceeded its safe yield. 

Aware of the scope of the problem, appropriators faced a very uncertain outcome in the legal case. As a result, all but two of the 32 parties to the case signed an agreement in which they “agreed to share the cutback proportionately” (113). After a short trial, a judge imposed this agreement on the two holdouts. Ostrom concludes, “By negotiating their own agreement, the parties had ended the pumping race faster and at a lower cost than they could have through a court proceeding” (114).

The West Basin, which was threatened with destruction per a 1944 report, faced challenges in resolving this problem. It was much larger than the Raymond Basin, with no dominant producer that could take the lead in negotiations. Additionally, some producers, given their location, bore more of the risk for saltwater intrusion than others. After the 1944 report, the major water producers established an ad hoc committee. That committee recommended that a permanent association of water producers be created, that a technical survey of alternative water resources be made of the area, and that the water producers consider litigation, similar to that filed for the Raymond Basin, to reduce pumping and ration the supply. All three recommendations were adopted. 

Although several producers opposed proportionate cutbacks, the initiation of litigation again changed the calculus. The report of a referee, which was ordered by the court, called for a two-thirds reduction in groundwater production. That was unacceptable to all and motivated the parties to reach an alternative agreement. An interim agreement was reached, calling for a 25-30% reduction. This agreement provided assurance to parties that they would not be “suckers” (119), as production rights were not curtailed until at least 80% of the producers signed. Two major producers, including the city of Hawthorne, refused to sign. Years later, a court forced those parties to abide by the agreement.

Although most of the Central Basin was inland, it had some exposure to the sea. At the behest of those experiencing saltwater intrusion, an organization was formed in 1950 similar to the one for the West Basin. Seeking to delay the costs and time associated with a court-ordered survey, the organization contracted for a private one. Ultimately, a court approved an interim agreement in which “producers agreed to cut back production on a proportional basis by 20% and establish a set of working rules” (123). The final settlement was approved in 1965 and was signed by parties holding 75% of the water rights. Pumpers in this Basin had advantages compared to the other two: Since it had only a small coastal section, there was more time to implement changes, and the pumpers also had the example of the other two settlements to follow. In all these cases, compliance was very high. With neutral monitoring and annual reports, anyone who did not comply would be exposed and a sanction applied.

After the interim agreement was signed in the West Basin, water producers realized that it would not be sufficient to manage the Basin long term. The litigation establishing the agreement did not require producers to cut back production enough. There was also the danger of saltwater intrusion in some places. There was experimentation in the 1960s with the construction of a barrier along the coast that would eliminate this danger. Such a barrier would protect both Basins, the boundaries of which were not well defined. Since no public agency had the authority to address these concerns, water producers formed an association that drafted legislation. The legislation required producers to file notices of their annual extractions with the state. It also authorized a new type of district that could replenish water supplies via a pump tax and a limited property tax. The legislation, the Water Replenishment District Act, provided constitutional rules for new districts.

With this framework in place, the West Basin had to consider the pros and cons of forming such a district with the Central Basin. On the positive side, there was a common purpose of replenishing the groundwater supply. A bigger district would also mean greater financial resources and political power, and administration costs would be lower. On the negative side, there were concerns that the Central Basin would dominate and might not continue a well-injection method needed in the West Basin. There could also be differences in the amount of curtailment in each Basin. 

Ultimately, members of both Basin associations agreed to form a combined district. A proposal for the new district was presented in 1958. Its purposes would be to repel saltwater intrusion, recharge the groundwater basins, and reduce pumping in the basins to within safe limits. The district would act as an agency, with a five-member board of directors. Ostrom explains that it served as a constitution for the purpose of making rules to be used in future collective choices.

The formal creation of the Central and West Basin Replenishment District in 1959 “transformed the structure of incentives facing water producers” (133). It managed the district in conjunction with two private associations and other public agencies. This system, created by the water producers, has been successful in restoring water levels at low cost. Ostrom notes that this case demonstrates that a governance system can evolve to remain mainly in the public sector, but without a central regulator. The process was marked by negotiation and bargaining. Indeed, the Basins were managed by a “polycentric set of limited purpose governmental enterprises” (136), with participation from private water companies and producer associations.

The assumption that appropriators will not expend resources to create new institutions was proven wrong in these case studies. The pumpers created public and private associations, financed litigation, and drafted legislation. The investment in such changes was made incrementally or step-by-step, with the appropriators aware of their colleagues’ actions. Each incremental step changed the structure of incentives. For example, the filing of litigation introduced uncertainty in outcomes: “That some rule changes could be undertaken with low transformation costs enabled the participants to gain some advantages of collective action before they were faced with more costly alternatives” (141). The voluntary associations allowed for the sharing of accurate information, and California’s laws also helped to incentivize organization.