Market Mechanics 69 



interrelations among water derivatives and the resultant complex 

 problems in river basin development. 



Where surface sources must be relied on for the services which 

 water derivatives perform, the value of a stream is enhanced signifi- 

 cantly by regulating its flow over time. This is accomplished by 

 impounding wasteful excess runoffs that may also threaten damage, 

 and by releasing water during periods when natural conditions 

 would provide only subnormal flows. Diverse objectives of water 

 control, such as flood prevention, navigation, salinity control, pol- 

 lution abatement, residential and recreational uses, as well as head 

 to move turbines, may all require storage. If storage is provided 

 to regulate stream flows for one purpose, it may also be useful, 

 within limits, 2^ to meet the requirements of some of the other pur- 

 poses. Viewed from the standpoint of a single activity — for ex- 

 ample, flood control — investment in land acquisition and dam 

 construction for storage provides factor services for each of the 

 other activities served by common storage in a multiple purpose 

 system. In a sense, the value of these factor services represents an 

 economy for the other functions, which is external to the flood 

 control activity considered independently. If all of the related 

 activities which common storage capacity serves are integrated into 

 a single fiscal unit, however, such external economies become "in- 

 ternalized" and appear on the economic accounts of the enterprise. 

 We then have the familiar case of the plant with multiple products, 

 established to achieve economies of scale. 



Consider the economic nature of the river basin program de- 

 scribed in Chapter I. Such a program, viewed in its entirety, in 

 some respects performs economic activities akin to a large enter- 

 prise with multiple products and multiple plants, not unlike some 

 of the integrated firms in the actual market economy. In other 

 respects, however, it differs significantly in ways which preclude 

 market mechanics from organizing efficiently the production and 

 distribution of water derivatives. For one thing, a river basin pro- 



^ Within limits, a complementary relation exists between hydroelectric pro- 

 duction and flood control; beyond the complementary range, a relationship of 

 substitutability exists. That is, more power can be provided only at the 

 expense of flood protection, and vice versa. Complementarity and substitutability 

 within difl^erent ranges characterize the relationship among many of the water 

 derivatives produced by a multiple purpose river system. 



