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Emerging Issues for Rural Communities

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Presented at "A Journey of Discovery - An Expedition of Learning" for Farm Credit Services of Grand Forks, Farm Credit Services of Mandan, and Farm Credit Services of North Dakota, September 23, 2004, Minot, North Dakota.

The purpose of this session is to consider the future of the agriculture industry and the rural northern plains, to interact and exchange ideas, and thus broaden our understanding of our opportunities.  As we contemplate opportunities for economic development for the next 30 years, we can be confident that we, and those who follow us, will encounter an array of challenges. Today, I want to touch on what I believe may be just three of those issues.

1.  The Constitutional limit on government regulation of private activities. 

We are looking for new opportunities for our rural communities, such as expanding the livestock industry, perhaps livestock feeding. An associated question/concern is directing the development of new opportunities (presumably we do not want the livestock industry developed without community/government direction).  Another example of a rural economic development opportunity is rural recreational activities, perhaps fee hunting; but again, this is unlikely to occur without some government direction.

• Assumption -- economic development by private ventures will be desired and encouraged, but will not be allowed to occur without some public guidance, such as zoning. 
• Question -- how much "guidance" can government provide?  Is there a limit to how much regulation government can impose?  If yes, what is that limit?
• Response -- there is a limit to how much regulation government can impose on private activities.

• But how much direction or limitation will government impose on economic developments?  This is both a political question and a legal question.  Today, we will focus on the legal question.
• Federal, state and local governments have the authority to direct activities such as "how individuals or private groups pursue business opportunities."

• Example - county zoning (look at N.D.C.C.)
  • "the board of county commissioners of any county may regulate and restrict within the county ... the location and the use of buildings and structures and the use, condition of use, or occupancy of lands for residence, recreation, and other purposes."  N.D.C.C. §11-33-01
• Government directing private activities is referred to as exercising "police power."
• Police power - authority to direct private activities for the benefit of the health, safety and general well-being of society.
• "For the purpose of promoting health, safety, morals, public convenience, general prosperity, and public welfare, the board of county commissioners of any county may regulate and restrict within the county ... the location and the use of buildings and structures and the use, condition of use, or occupancy of lands for residence, recreation, and other purposes." N.D.C.C. §11-33-01 [emphasis added]

• Government does not have unlimited authority; there is a point where government action will be considered a "taking."   The US Constitution states that private property cannot be taken without "just compensation."

• But when does the government exercise of police power become a taking? Restated, when does a regulation become a taking?

• Property is the rights someone has over an item; thus my property can be taken even though I am still the "owner" of the land. Restated, a government "taking" is not limited to situations where the ownership of the land or item is transferred to the government entity.

  • "The question of whether or not there has been a taking of private property for public use is a question of law which is fully reviewable by this Court on appeal ... The state, acting through its police power, has broad authority to enact land use regulations without compensating landowners for restrictions placed upon their property, and a zoning ordinance, one type of land use regulation, does not constitute a taking for which compensation must be paid merely because it diminishes the value of the regulated property or disallows the best and highest use of the property ... However, governmental regulation which prohibits all or substantially all reasonable use of the regulated property constitutes a taking of the property for public use which entitles the landowner to just compensation through an inverse condemnation action." Rippley v. City of Lincoln, 330 N.W.2d 505 (N.D. 1983)

• When is a regulation a "taking?"   US Supreme Court guidance as to when a regulation becomes a taking:
• Paraphrased from the syllabus of Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978) (USSCt)

(b) In deciding whether particular governmental action has effected a "taking," the character of the action and nature and extent of the interference with property rights ... are focused upon ... Consequently, [the property owners] cannot establish a "taking" simply by showing that they have been denied the ability to exploit [a portion of the parcel], irrespective of the remainder of [their] parcel.

(d) [The fact that the regulation] affects some landowners more severely than others does not, itself, result in "taking," for that is often the case with general welfare and zoning legislation.

(f) The [regulation], which does not interfere with the [land's] present uses or prevent [the owners] from realizing a "reasonable return" on its investment, does not impose the drastic limitation on [the owners'] ability to use the [portion] that [they] claim, [because there is no indication that an alternative use] would not be authorized. 

• Paraphrased from the syllabus of Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992) (USSCt)
  (a) Regulations that deny the property owner all "economically viable use of his land" constitute one of the discrete categories of regulatory deprivations that require compensation ... Although the Court has never set forth the justification for this categorical rule, the practical -- and economic -- equivalence of physically appropriating and eliminating all beneficial use of land [justifies that this legal concept should be continued].

(c) Rather, the question must turn, in accord with this Court's "takings" jurisprudence, on citizens' historic understandings regarding the content of, and the State's power over, the "bundle of rights" that they acquire when they take title to property. Because it is not consistent with the historical compact embodied in the Takings Clause that title to real estate is held subject to the State's subsequent decision to eliminate all economically beneficial use, a regulation having that effect cannot be newly decreed, and sustained, without compensation's being paid the owner. However, no compensation is owed -- in this setting as with all takings claims -- if the State's affirmative decree simply makes explicit what already inheres in the title itself, in the restrictions that background principles of the State's law of property and nuisance already place upon land ownership.

• Excerpts from Rose Acre Farms, Inc., v. United States, US Court of Appeals for the Federal Circuit, June 30, 2004.

  A regulatory takings claim "'arises from some public program adjusting the benefits and burdens of economic life to promote the common good,'" . When a takings claim arises from [a regulation], it is necessary to determine whether "'justice and fairness' require that economic injuries caused by public action be compensated by the government, rather than remain disproportionately concentrated on a few persons." . No per se rules or "set formula[s]" govern such determinations; instead, courts "engag[e] in ... essentially ad hoc, factual inquiries." The Supreme Court has, however, identified several factors having particular significance, namely, the "economic impact of the regulation on the claimant," "the extent to which the regulation has interfered with distinct investment-backed expectations," and "the character of the governmental action." Application of these Penn Central criteria is required where, as here, "less than a 'complete elimination of value'" resulted from the regulation at issue.

[Inserted from another section of the opinion] The Lucas per se rule only applies in the 'extraordinary case' where three prerequisites are met: the regulation must (1) permanently deprive, (2) the whole property, (3) of all its value" (emphasis in original).

A. Economic Impact

Simply put, it is not possible to determine the economic impact of a regulatory scheme applied to a private [person] without casting the appropriate absolute measures of the effect of the regulation against the backdrop of relevant indicators of the economic vitality of the [persons] ... Yet, an assessment of the severity of the economic impact of the regulations . must take [those relevant indicators] into account.

In regulatory takings cases concerning diminished real estate values, this concept is known as the "parcel as a whole."

"Taking" jurisprudence does not divide a single parcel into discrete segments and attempt to determine whether rights in a particular segment have been entirely abrogated. In deciding whether a particular governmental action has effected a taking, this Court focuses rather both on the character of the action and on the nature and extent of the interference with rights in the parcel as a whole.

The Court recently elaborated on this concept, stating:

This requirement . also clarifies why restrictions on the use of only limited portions of the parcel, such as setback ordinances or a requirement that coal pillars be left in place to prevent mine subsidence were not considered regulatory takings.

We recognized in Yancey that comparable or even larger diminutions in value had been held insufficient for takings purposes in particular cases (holding that a 75% value diminution caused by a zoning law did not constitute a taking), and (holding that no taking resulted from an 87½% diminution in value). We rejected the notion that such cases set a minimum value diminution that had to be demonstrated for liability to lie. In so doing, we recognized that "the modern Penn Central approach" requires a balancing of "all the relevant considerations."

All of which is to note that there are a number of different ways to measure the severity of the impact of the restrictions.

B. Reasonable Investment-Backed Expectations

The trial court noted that, although the industry in general is highly regulated, government experts previously believed [the problem arose in only one way]. Accordingly, prior to 1990, [the government pursued one type of regulatory action. The recent change in government regulatory action, based on new scientific understanding of the problem, was not contemplated by private persons who made investments in the industry prior to this new understanding. Accordingly, the investors would argue that the new regulatory scheme interferes with reasonable investment-backed expectations.]

The government [in its counter-argument] seeks to define the field of relevant regulation more broadly, citing to long-standing regulations aimed at preventing the [problem]. It argues that a new regulation aimed at a specific, recently-recognized disease threat was not unforeseeable in such an environment.

But the [new] regulations were more than an extension of comparable regulations to a new disease. They were grounded in new scientific understanding... Accordingly, even accounting for the history of regulation in the industry, we cannot agree that [this regulation did not extend to a new issue].

C. Character of the Government's Action

"[a] 'taking' may more readily be found when the interference with property can be characterized as a physical invasion by government, . . . than when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good." The court cited with approval a decision holding that no compensation under the Fifth Amendment was due orchard owners ordered to cut down their ornamental cedar trees infected with cedar rust to protect neighboring apple orchards. This decision so held based solely on the power of the state to prevent impending harm to a valuable public resource -- the apple industry. "[W]here the public interest is involved preferment of that interest over the property interest of the individual, to the extent even of its destruction, is one of the distinguishing characteristics of every exercise of the police power which affects property." "Although a comparison of values before and after" a regulatory imposition "is relevant, ... it is by no means conclusive..."

As noted above, Keystone Bituminous also sprang from a police power regulation -- action on the part of the Commonwealth of Pennsylvania "to protect the public interest in health, the environment, and the fiscal integrity of the area." The Court there noted that "the nature of the State's interest in the regulation is a critical factor in determining whether a taking has occurred." It reaffirmed the principle that "no individual has a right to use his property so as to create a nuisance or otherwise harm others," and noted that "the Takings Clause did not transform that principle to one that requires compensation whenever the State asserts its power to enforce it."

"A regulation that burdens private property may 'constitute a "taking" if [the burden is] not reasonably necessary to the effectuation of a substantial public purpose.'" (quoting Penn Central).

But the issue is not whether a less restrictive alternative to the government action existed or was "possible." It is whether there is a nexus between the regulation and its underlying public purpose (if the regulation "utterly fails to further the end advanced as the justification," the "purpose then becomes the obtaining of an easement to serve some valid governmental purpose, but without payment of compensation").

The trial court's finding that [private person] "shared a disproportionate amount of the burden of the . regulations," even if correct, is not relevant.

D. Balancing of the Penn Central Factors

The Penn Central test was "designed to allow 'careful examination and weighing of all the relevant circumstances.'" Whether the regulations at issue in this case went "too far" and, therefore, constituted a taking is thus determined by balancing their interference with [the person's] right to use its property in accordance with its reasonable economic expectations against the substantiality of the government's purpose and the nexus between that purpose and the means undertaken to achieve it.

End of excerpt from Rose Acre Farms, Inc.

• If there is a taking, the property owner is entitled to be compensated or the government has to stop its action.

  "If a landowner proves that governmental regulation has deprived him of all reasonable use of his property, he is entitled to receive just compensation. However, the landowner cannot force a permanent taking upon the governmental body if the taking is reversible and the government wants to halt the taking. Rather, under its police power authority, the governmental body can choose to rescind the ordinance or other regulation in which case it must compensate the landowner only for a temporary taking measured by the time period between the date the regulation took effect and the date it was rescinded. If, however, the governmental body chooses to retain the ordinance or other regulation the landowner is then entitled to compensation for a permanent taking of his property."  Rippley v. City of Lincoln, 330 N.W.2d 505 (N.D. 1983)

• Something to keep in mind when talking about developing, while directing, economic opportunities. How far can local government go in regulating private activities?

2. Water - critical resource not only for life but also for economic development; e.g., manufacturing, recreation, etc.

• Question -- who decides how, how much, when, where, and who uses our water?
• Response -- the general rule is that states are authorized and responsible for managing our water resources, but there are exceptions.

• Allocating the right to use water is primarily a state privilege/responsibilities.
• ND Constitution, Art. X1, Section 3. All flowing streams and natural watercourses shall forever remain the property of the state for mining, irrigating and manufacturing purposes.
• N.D.C.C. §61-01-01. All waters within the limits of the state from the following sources of water supply belong to the public and are subject to appropriation for beneficial use and the right to the use of these waters for such use must be acquired pursuant to chapter 61-04:
  1. Waters on the surface of the earth excluding diffused surface waters but including surface waters whether flowing in well-defined channels or flowing through lakes, ponds, or marshes which constitute integral parts of a stream system, or waters in lakes;
  2. Waters under the surface of the earth whether such waters flow in defined subterranean channels or are diffused percolating underground water;

3. All residual waters resulting from beneficial use, and all waters artificially drained; and
4. All waters, excluding privately owned waters, in areas determined by the state engineer to be noncontributing drainage areas.

• Allocation within state - in the western states (including North Dakota), the first person to put water to a beneficial use has highest right to keep using it (prior appropriation doctrine).

• N.D.C.C. §61-04-06.3. "Priority in time shall give the superior water right. Priority of a water right acquired under this chapter dates from the filing of an application with the state engineer, except for water applied to domestic, livestock, or fish, wildlife, and other recreational uses in which case the priority date shall relate back to the date when the quantity of water in question was first appropriated, unless otherwise provided by law."
• N.D.C.C. §61-04-01.2. "A right to appropriate water can be acquired for beneficial use only as provided in this chapter. Beneficial use shall be the basis, the measure, and the limit of the right to the use of water."
• N.D.C.C. §61-04-01.1(1) "Beneficial use" means a use of water for a purpose consistent with the best interests of the people of the state.

BUT - who else wants the water?

• Federal reserved rights -- Winters v. U. S., 207 U.S. 564 (1908) -- in which the US Supreme Court ruled:

  the federal government reserved the right to enough water to "support the purpose of the agreement"; which, in this case, was to provide Native Americans a place "to occupy and use ... to become a pastoral and civilized people..; but a smaller tract would be inadequate without ... irrigation."

  • Also see An Analysis of Current and Pending Indian Water Rights Settlements

  • "The rationale used in the Winters decision on behalf of Native Americans also applies to public lands held by the federal government for national parks, wildlife refuges, national forests, military bases, wilderness areas, or other public purposes. It holds that when Congress authorized the establishment of federal land, it implicitly intended to reserve enough water to fulfill congressional purposes. Subsequent judicial decisions authorize federal reserved water rights on lands set aside by statute, treaty, or executive order. They are defined by the documents that set the land aside (treaty, executive order, statute) and recognized within individual states by negotiation or litigation.

"Unlike state rights under prior appropriation systems, federal reserved water rights may remain unused for many years. This fact generates much concern on the part of state water administrators and water rights holders who fear that existing water allocation regimes will be disrupted once reserved rights are exercised.

"Regardless of the uncertainty such reserved rights create, states cannot prevent the eventual exercise of these federal property rights in water. Federal reserved rights are limited to the purposes of the reservation of land and to quantities sufficient to fulfill these purposes. A federal case, United States vs. New Mexico, ruled that when quantifying federal reserved rights, quantities are limited to the minimum amount necessary to fulfill the purposes for which the land was set aside." 

Taken from The doctrine of reserved water rights -- a web site by the CHEHALIS RIVER COUNCIL

• Allocating water among states - three traditional methods to resolve interstate disputes over water
  1. "Equitable apportionment is the doctrine of federal common law that governs disputes between States concerning their rights to use the water of an interstate stream. Kansas v. Colorado, 206 U.S. 46, 98 (1907); Connecticut v. Massachusetts, 282 U.S. 660, 670-671 (1931). It is a flexible doctrine which calls for "the exercise of an informed judgment on a consideration of many factors" to secure a "just and equitable" allocation. Nebraska v. Wyoming, 325 U.S. 589, 618 (1945). We have stressed that in arriving at "the delicate adjustment of interests which must be made," ibid., we must consider all relevant factors, including:
"physical and climatic conditions, the consumptive use of water in the several sections of the river, the character and rate of return flows, the extent of established uses, the availability of storage water, the practical effect of wasteful uses on downstream areas, [and] the damage to upstream areas as compared to the benefits to downstream areas if a limitation is imposed on the former." Ibid.

Our aim is always to secure a just and equitable apportionment "without quibbling over formulas." New Jersey v. New York, 282 U.S. 336, 343 (1931).

"The laws of the contending States concerning intrastate water disputes are an important consideration governing equitable apportionment. When, as in this case, both States recognize the doctrine of prior appropriation, priority becomes the "guiding principle" in an allocation between competing States. But state law is not controlling. Rather, the just apportionment of interstate waters is a question of federal law that depends "upon a consideration of the pertinent laws of the contending States and all other relevant facts."

Taken from Colorado v. New Mexico, 459 U.S. 176 (1982)

2. Interstate compact

• States, with Congressional approval, may enter into agreements to resolve disputes, including the allocation of water in an interstate river.
• See N.D.C.C. 61-23 Yellowstone River Compact (specifically Article V); also see Colorado Water - Interstate Compacts

3. Congressional appropriation

• The US Supreme Court in Arizona v. California, 373 U.S. 546 (1963) concluded that Congress allocated water in the Colorado River among California, Arizona, and Nevada.  The following points are taken from the syllabus; note how the court also had to consider the concepts of equitable apportionment, interstate compacts, and federal reserved water rights.  This may be a unique situation because Congress has not taken such steps in other legislation.

"The basic controversy is over how much water each State has a legal right to use out of the waters of the Colorado River and its tributaries... Held:

1. In passing the Boulder Canyon Project Act, Congress intended to, and did, create its own comprehensive scheme for the apportionment among California, Arizona and Nevada of the Lower Basin's share of the mainstream waters of the Colorado River, leaving each State her own tributaries. It decided that a fair division of the first 7,500,000 acre-feet of such mainstream waters would give 4,400,000 acre-feet to California, 2,800,000 to Arizona, and 300,000 to Nevada, and that Arizona and California should each get one-half of any surplus. Congress gave the Secretary of the Interior adequate authority to accomplish this division by giving him power to make contracts for the delivery of water and by providing that no person could have water without a contract.

(a) Apportionment among the Lower Basin States of that Basin's Colorado River water is not controlled by the doctrine of equitable apportionment or by the Colorado River Compact (which, in the early 1920s, divided the entire Colorado River basin into the Upper Basin (4 states) and the Lower Basin (3 states), and apportioned each basin in perpetuity 7,500,000 acre-feet of water year from the Colorado River).

(b) No matter what waters the Compact apportioned, the Project Act itself dealt only with water of the mainstream and reserved to each State the exclusive use of the waters of her own tributaries.

(c) The legislative history of the Act ... show[s] that Congress intended to provide its own method for a complete apportionment of the Lower Basin's share of the mainstream water among Arizona, California and Nevada; and Congress intended the Secretary of the Interior, through his contracts ... to carry out the allocation of the waters of the main Colorado River among the Lower Basin States and to decide which users within each State would get water.

(d) It is the Act and the contracts made by the Secretary of the Interior.., not the law of prior appropriation, that control the apportionment of water among the States; and the Secretary, in choosing between the users within each State and in settling the terms of his contracts, is not required by ... the Act to follow state law.

(e) ... the Reclamation Act does not require the United States, in the delivery of water, to follow priorities laid down by state law; and the Secretary is not bound by state law in disposing of water under the Project Act.

(f) ...

(g) ...

2. ...

3. In case of water shortage, the Secretary is not bound to require a pro rata sharing of shortages. He must follow the standards set out in the Act; but he is free to choose among the recognized methods of apportionment or to devise reasonable methods of his own, since Congress has given him full power to control, manage and operate the Government's Colorado River works and to make contracts for the sale and delivery of water on such terms as are not prohibited by the Act.

4. ...

5. As to the claims asserted by the United States to waters in the main river and some of its tributaries for use on Indian reservations, national forests, recreational and wildlife areas and other government lands and works, this Court approves the Master's decision as to which claims required adjudication, and it approves the decree he recommended for the government claims he did decide.

(a) This Court sustains the Master's finding that, when the United States created the ... Indian Reservations in Arizona, California and Nevada, or added to them, it reserved not only the land but also the use of enough water from the Colorado River to irrigate the irrigable portions of the reserved lands.

(1) The doctrine of equitable apportionment should not be used to divide the water between the Indians and the other people in the State of Arizona.

(2) Under its broad powers to regulate navigable waters under the Commerce Clause and to regulate government lands under Art. IV, 3, of the Constitution, the United States had power to reserve water rights for its reservations and its property.

(3) ...

(4) The United States reserved the water rights for the Indians, effective as of the time the Indian reservations were created, and these water rights, having vested before the Act became effective in 1929, are "present perfected rights" and as such are entitled to priority under the Act.

(5) This Court sustains the Master's conclusions that enough water was intended to be reserved to satisfy the future, as well as the present, needs of the Indian reservations and that enough water was reserved to irrigate all the practicably irrigable acreage on the reservations, and also his findings as to the various acreages of irrigable land existing on the different reservations.

(b) ...

(c) This Court agrees ... that the United States intended to reserve water sufficient for the future requirements of the Lake Mead National Recreational Area, the Havasu Lake National Wildlife Refuge, the Imperial National Wildlife Refuge and the Gila National Forest.

(d) ...

(e) ...

end of excerpt from Arizona v. Calitfornia

• What is the status of the Missouri River?  There is no US Supreme Court equitable apportionment; there is no interstate compact; there is no Congressional legislation.  What do we have?
• The Missouri River Mainstem Reservoir System consists of six dam and reservoir (lake) projects constructed, operated and maintained by the U.S. Army Corps of Engineers for flood control, navigation, irrigation, hydropower, water supply, water quality, recreation, and fish and wildlife habitat. To achieve these multipurpose benefits, the projects are operated as a hydrologically electrically integrated system.  Taken from Introduction to Missouri River Master Water Control Manual
• The challenge is operating the projects for the purposes of flood control, hydropower, water supply, water quality, irrigation, navigation, recreation, and fish and wildlife, including the issues of how storage in the Mainstem Reservoir System is divided and how water is released during navigation and nonnavigation periods.
• Several alternatives were studied and a plan was chosen:

  "The Selected Plan includes several changes from the previous Master Manual’s water control plan. The modifications are as follows:

  • drought conservation measures;
    • "navigation service level and season length would be reduced to conserve stored water in the upper reservoirs during extended drought periods ... which would most likely coincide with a national drought emergency."
  • unbalancing of the upper three reservoirs;
    • "The unbalancing process is rotated among the upper three reservoirs on a 3-year cycle. ...unbalancing provides for resident fishery production by lowering one of the three reservoirs allowing vegetation to grow around the rim. The subsequent year the reservoir is refilled, inundating the vegetation around the perimeter, which is used by adult fish for spawning and by young reservoir fish to hide from predators. The third year, the reservoir rises during the fish spawn and then slowly falls for the remainder of the year so that it is positioned to be at low elevation the following year. Unbalancing would also provide more emergent sandbar and shoreline habitat for the Endangered Species Act (ESA) listed birds."
  • non-navigation flows; and
    • "minimum flows for periods when navigation is not supported during droughts, or other “non-navigation” periods. These flows provide for water supply to the thermal powerplants and other municipal and industrial intakes on the river or reservoirs... dams will be regulated to ensure adequate flows to serve water supply in the river reaches downstream of the System and between the System reservoirs"
  • an adaptive management process."
    • "used to implement changes designed to improve the benefits provided by the System, including benefits to the threatened and endangered species."

  taken from Record of Decision Missouri River Master Water Control Manual Review and Update

• The plan emphasizes in-stream uses even though it acknowledges diversionary uses (e.g., irrigation, municipal, industrial); does the plan resolve issues arising over diversionary uses?

• Previous cases primarily addressed consumptive or diversionary water uses; the current plan primarily centers on in-stream uses, that is, navigation and recreation.  This raises several questions.
  • Is in-stream use of water for navigation or recreation a beneficial use? States split; we do not have a clear answer for interstate water.
    • N.D.A.C. 89-03-01-07. "Necessity of works and construction of works for a ... water permit. A permit application may only be considered if works are associated with the proposed  appropriation."

That is, North Dakota will not grant water permit for an in-stream use.

• Instream Flows In Washington, Department of Ecology

"Instream flows are usually defined as the stream flows needed to protect and preserve instream resources and values, such as fish, wildlife and recreation. Instream flows are most often described and established in a formal legal document, typically an adopted state rule."

• Is the current Master Water Control Manual plan, with its focus on in-stream uses, relevant in resolving other interstate disputes over Missouri River water (such as questions about who can divert water)?

• Allocating water among nations
  • Treaties; e.g., Boundary Waters Treaty
  • Alternative to treaties?

• How will the availability of water impact rural economic development in the future?

3. Information and risk -- review of selected concepts from economic theory

• Production agriculture is often used in economic theory as an example of a perfectly competitive industry, and like any other business, employs the resources of land, labor, capital and entreprenurial ability.  Entreprenurial ability is described in economic theory as a person who initiates a venture, makes basic business-policy decisions, innovates, and bears risk. (For example, see McConnell and Brue, Economics, 14th Edition, pp. 468-469, 23-24).

• Characteristics of perfect competition
• Many buyers and sellers; homogenous product; perfect (or more realistically, access to identical) information; ease of entry and exit from industry; mobile resources (they can shifted to another industry or use).
• Consequence of being in a perfectly competitive industry is that the seller is a price taker -- a seller cannot influence the market price. 
• Also, businesses in a perfectly competitive industry breakeven in the long run; there are no economic profits.  To reach this point, some businesses in the industry will earn an economic profit, some will break-even, and others will incur net operating losses and eventually go out of business.
• The level of competition reflects the number of sellers in the market, and the size of the market is influenced by the distance over which one can interact.  Transportation and information technology influences the distance over which a business can operate, thus advances in transportation and information technologies increase competition.
• There are more opportunities to earn an economic profit if the business operates in an industry that is not perfectly competitive; thus a manager may strive to have a unique product or service, or control unique production or market information (those are the only two characteristics of a competitive industry that a manager can impact).

• Factors of production
  • Traditional description of business resources and their return is land (rent), labor (wages), capital (interest) and entreprenurial ability (profit).
  • Would it be more appropriate to suggest an alternative description of land (rent), labor (wages), capital (interest), information (royalty), and risk exposure (profit)?
    • This alternative description shifts management to the labor category thus entitling mangers to a wage; it also means that being the manager does NOT entitle you to the profits.  This alternative description shifts innovation (innovative ideas) to its own category (information), and leaves risk by itself to either earn a profit or incur a loss.  This description implies that managers do not bear the loss if the business fails.
  • Now we have something in common between the competitiveness in an industry and the factors of production; that is, market and production information.
    • Information can be purchased by paying a royalty, such as buying production technology or market information.  It implies that information can be controlled.  Also, information is not always public; some would suggest it is increasingly private.
    • If a business manager does not have the information needed to shift the business out of perfect competition, the information needs to be purchased (do not expect the information to be given to you). 
    • For example, most biotechnology is unique production technology.  The owner of that technology can protect and control it via patent and copyright laws, and contracts.
  • Unique market information probably entails an opportunity to sell your product; again, control access to unique market opportunity with a contract.
  • The risk bearer will earn a profit or incur a loss; restated, to earn a profit, you have to bear the risk.
    • The risk bearer does not need to provide capital to bear the risk, the risk bearer merely needs to agree to bear any loss; an example would be a co-signee or guarantor.  
    • Risk can be transferred by forsaking or giving up some profit, such a paying an insurance premium. 
    • If the risk is borne by others, the opportunity to earn a profit is reduced. 
    • But if we want an opportunity to earn a profit, we have to accept some of the risk. How much risk do we bear?  What is our willingness to bear risk?  What is our capacity to bear risk?  How do we manage our risk exposure?

E-Mail agecinf@ndsuext.nodak.edu
Published by Agribusiness and Applied Economics
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