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when the well runs dry
To End Shortages, Make Water More Expensive

Many U.S. states are experiencing water shortages, but California is going dry so quickly that the state’s water authority declared it a crime to waste water. Eduardo Porter argues in the New York Times that the water scarcity crisis stems from dysfunctional pricing.Water is far too cheap, according to Porter, because subsidies and other obstacles distort its value. More:

Consumers have little incentive to conserve. Despite California’s distress, about half of the homes in the capital, Sacramento, still don’t have water meters, paying a flat fee no matter how much water they consume.

Some utilities do worse: charging decreasing rates the more water is consumed. Utilities, of course, have little incentive to discourage consumption: The more they did that the more their revenues would decline. […]

Farmers pay if the government brings the water to the farm, say via an aqueduct from the Colorado River. But the fees are minimal….And the government has often subsidized farmers via things like interest-free loans to cover upfront investments….

This kind of arrangement helps explain why about half the 60 million acres of irrigated land in the United States use flood irrigation, just flooding the fields with water, which is about as wasteful a method as there is.

At Marginal Revolution, Alex Tabarrok notes that subsidized water also props up hugely inefficient projects to farm crops in water-poor areas when they could be grown more efficiently elsewhere. The areas in American life where we see some of the worst cases of waste and overconsumption—health care, education, and, apparently, water use—all share the same trait: third parties bear costs in a way that prevents real markets from forming. The results have been bad to disastrous, depending on the product in question. Read both the original Porter piece and the Marginal Revolution commentary—each offers useful suggestions for solving this problem in water supply.

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  • Arkeygeezer

    Why is the answer to all problems is either to Tax it or make it more expensive. Problem with health care? Make it more expensive. Problem with climate change? Tax carbon dioxide (1/2 of 1 % of the atmosphere.). Problem with booze and cigarettes? Tax them. Problem with water shortages in California? Make water more expensive for everybody in the U.S.

    • Andrew Allison

      I agree in principle but in this case, it’s about supply and demand. Since we can’t change the supply, we need to reduce the demand. Since two-third of U.S. water consumption is for irrigated agriculture (80% in California), it’s pretty that we need to incentivise agricultural conservation.

      • Arkeygeezer

        You can incentive California all that you like. Just because California has problems with water consumption, this is not a problem in other states in the central or eastern U.S. Its like the toilet flushing problem; there is not a national solution to this situation.
        The alleged problem with health care is not being solved by raising the cost on everyone;
        The alleged problem with climate change is not being solved by taxing CO2;
        The alleged problem with boose and cigarettes is not being solved by taxes; and
        California’s water problems are not going to be solved by making water more expensive for everybody in the U.S.

        • Andrew Allison

          Half the fruit, nuts and vegetables consumed in the U.S. are (were?) grown in California.

    • Fat_Man

      You have vastly overstated the amount of CO2 in the atmosphere. It is 400 parts per million or 0.04%. 1/2 of 1% is 12.5 times as much.

      • Arkeygeezer

        Correct, I misplaced a décimal. Sorry about that.

    • FriendlyGoat

      1) Would we be wrong to admit that everything sold in private enterprise is always priced at the maximum which the market will bear? Water is headed that direction.

      2) We have lots of problems we cannot tax or are not taxing. One good example is bullying in schools. Another is pit bulls. Another is religion in politics, and its worse cousin, politics in religion.

      • Arkeygeezer

        Of course everything sold in private enterprise is priced at the maximum the market will bear so that government can tax the profits. Even bottled water.

        Pit bulls, bullying, politics and religion are not taxed because its against the constitution. Government would tax them if it could.

        • FriendlyGoat

          If you think prices are set so government can tax profits—-oh dear. Is that why NFL tickets are rather expensive?
          The government?

          • Arkeygeezer

            No, only if the scalpers report their earnings. Of course you liberals would not imagine that they would not report their earnings to the government. That would be unheard of.

    • Fat_Man

      Well [NPI], I think you are barking up the wrong tree. The cost of gathering and distributing water exists everywhere. I pay a quarterly water bill to cover the costs that my municipality incurs to gather, distribute, and dispose of water.

      I do not live in a drought stricken area. Indeed, my biggest water problem right now is getting enough dry days in a row to allow the repairs to my rain gutters to be done.

      California is a very screwed up situation. Enormous water gathering and distribution projects were built and maintained by the Federal Government. And a lot of folks have been getting their water at the expense of taxpayers far away.

      To ask that the users of water pay the cost of providing it to them is only fair to everyone who lives somewhere else and who pays taxes.

      Other cost reassignments and tax increases must stand on their own bottoms. The USA is deeply in debt. The debt must be paid. Your taxes will go up and your standard of living will go down. Deal with it.

      • Wayne Lusvardi

        California farmers, not “taxpayers far away”, pay 100% of the costs of California’s Central Valley Project through water rates. It is a libertarian fiction that California farmers receive water subsidies. No taxpayers are paying for farmers’ water.

        Moreover, there no longer are crop subsidies paid to farmers due to the globalization of agricultural markets. Any surplus crops do not have to be bought up by the Federal government, they can be sold in global markets now. Crop subsidies for cotton are a thing of the past for example.

    • Wayne Lusvardi

      A pilot study I conducted of water rates in Orange County, California indicated that flat water rates actually results in LESS water use per person than water rates that step up the more water one uses. Water is not a commodity, it is a service.

  • Sibir_RUS

    Lake Baikal, Siberia, Russia

    Lake Baikal is the freshwater lake with greatest volume in the world, containing roughly 20% of the world’s unfrozen surface fresh water, and at 1,642 m (5,387 ft), the deepest. It is also among the clearest of all lakes, and thought to be the world’s oldest lake at 25 million years. It is the seventh-largest lake in the world by surface area.

  • gabrielsyme

    Certainly there can be no excuse for failing to meter and charge a market price for residential and most business uses of water. Agriculture, on the other hand, is a different question: most farms have a historic access to water at a nominal price. In general, most California farms were originally established on exactly this understanding. While there may not be a legal right to cheap water, it would still work an injustice to renege on the crucial promises once made by government to individual families and farmers. Moreover, charging the same rate as residential users would be enormously disruptive, resulting in massive unemployment and bankrupting many farms.

    The solution, it seems to me, would be to calculate current average water usage by crop and location, then give farmers block grants reflecting (more or less) their current water usage – and then charge market prices, which would recoup much, if not all of the block grants. Farmers wouldn’t be, on the whole, worse off to start with, and with price signals, they would start conserving water, pocketing some of the block grants, and leaving more water for the cities. Since water use in the cities is generally paid for, the state would end up making a profit as well.

    Problem solved.

    • Andrew Allison

      Better to just charge a little more for the water than to establish another bureaucracy to determine who gets what. Aside from the cost, there would be enormous scope for abuse. The fundamental problem, as noted below, is that demand exceeds supply and we have no control over the latter (desal might be feasible at residential user rates, but would be ruinously expensive for farmers). Conservation, by whatever means, is the only choice. FWIW, the current situation in California results from just three years of drought and such droughts typically last for seven years, with much longer ones occurring occasionally (

      • gabrielsyme

        Significantly increasing prices on farmers is politically impossible, as well as undesirable for the reasons I mentioned above. But you can create the same incentives to conserve by having a grant program and charging the real marginal going rate; you can’t create the same incentive by charging a tenth or a twentieth the going rate (which would represent a far bigger hike in water costs for farms than “a little more”). Conservation only works if consumers have incentives to reduce.

        Not all bureaucracies are unwise or unnecessary. A grant program is necessary for effective price signals to reach the agricultural sector without destroying the livelihood of thousands.

    • Fat_Man

      Why do California farmers get to rely on ripping-off other tax payers? even if they have been doing it for a long time. Why not say to them, as we must say to so many people in this country and elsewhere, (think of the German Defense Budget) no more free rides. You have had a lot of fun and made a lot of money, but it is time you paid your own way. I see no injustice in that.

      • gabrielsyme

        It’s not a matter of the farmers “ripping off” anyone. See Wayne Lusvardi’s comment above. To the extent California needs to increase water costs, they should follow something along the lines of the system I propose above.

  • Andrew Allison

    You are right, of course, that making water more expensive will reduce usage. It is ridiculous that water is free in Sacramento (source, naturally, of the legislation which makes wasting water a crime!), but residential usage represents only 11% of the water consumed in California, about the same amount as is used to grow almonds ( As you point out, agriculture, which consumes 80% of the water in California and two-thirds nationwide is not paying enough to incentivize conservation. Overlooked in such discussions is the cost of moving all that water around.

  • Wayne Lusvardi

    As someone who writes for a free market think tank on water, allow me to say that the Alex Tabarrok and other self-described libertarian economists lack an understanding of how markets for water operate in California and most of the U.S. They don’t operate in a pure socialized system of cheap water nor in a purely private market. They operate in a market in water contracts. Moreover, there is no magical fix for drought in higher water pricing. The best study we have found of tiered water pricing in the Edwards Aquifer in Texas found that such pricing results in 5 to 6% greater water use.

    Farming would become obsolete if all farmers had to compete with cities or each other in water market. Moreover, cities would entirely lack water for dry years without farmers paying to keep in place the massive California State Water Project and Central Valley Project supplying water for droughts.

    Farming requires large upfront costs of buying large expanses of land, buying farm equipment, seed, cultivating land and borrowing capital from farm banks to undertake growing crops. For farmers to have to compete each day, month, or year for water in a competitive market would eliminate farming altogether because the certainty of the price of water to underwrite loans to farmers would not exist.

    Additionally, to amortize the gigantic cost of building dams, reservoirs and aqueducts, bonds have to be issued and paid back over 50 years or so. Neither farming or building dams could occur if every farmer and city had to go into a “spot market” each day, month or year to buy water. The way the costs of the Federal Central Valley Project are paid back is by water rates to farmers. Those water rates have to be established based on cost, not based on market price. If they were based on market price, no bonds could every be issued to underwrite the construction of dams or aqueducts.

    The solution to a situation where there are large upfront costs is water contracts. 95% of system water in California is allocated by long term contracts. 5% of system water is allocated by water auctions or water transfers. In a drought, the 5% should be expanded to at least 10%.

    Moreover, about 60% to 70% of the water for California’s farmers comes from system water and 30% to 40% from farmers’ own groundwater through a system of water rights. So if groundwater also had to be exposed to a “spot market” there would be economic anarchy and constant water warring.

    There is a vibrant market for water in California. But it is a market in long-term water contracts and in private property rights to groundwater that can be traded between farmers or between farmers and cities.

    Moreover, the difference between the cost of water reflected in water rates and the price of water in water auctions during droughts is not a subsidy, contrary to many libertarian water economists. No taxpayers are paying a water subsidy to farmers. For the most part crop subsidies for rice and cotton and other crops in California are no longer necessary with the globalization of agricultural markets. Farmers can sell surplus crops in the global market and no longer need crop subsidies. The 2013 Congressional Farm Bill eliminated crop subsidies and replaced it with unsubsidized crop insurance programs.

    Imagine what would happen if we told homeowners that the interest rates on their home loan had to be paid in a spot market of interest rates that changes daily, monthly or yearly? We don’t say that households have to go into a spot market each month or year to buy a house, so why do we say that farmers must go into a spot market for water? If there were no long term loan contracts for building and buying homes no new housing would be built or sold and there would not be such a thing as the real estate market. So again, why should farmers or cities have to buy water in auctions except in droughts?

    Additionally, a glaring piece of misinformation by Mr. Tabarrow needs correction. Agriculture does not use 80% of all system water in California. According to the Cal Dept. of Water Resources, it uses 42% on average and only 28% in crucial dry years when water has to be stored up for future droughts. Conversely, wildlife refuges use 64% of all system water in critical wet years. Agriculture only uses about 17% of all rainfall in California each year on average.

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