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.