David R. Henderson  

California Drought: A Pricing Problem

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A simple economic truth is that water-price hikes can get the job done without the expense--and the inefficiency--of conservation ads and water police--as well as the discord that can arise when neighbors snitch on and shame each other.

Also, people differ dramatically in their subjective evaluation of goods and services, and water authorities, no matter how smart they are, literally cannot know these evaluations. Who is to say whose water use is more "fair"--that of the gardener who delights in a green, perhaps small, yard or that of the diner who likes guacamole with chips before a steak dinner and a chocolate dessert? An extra day of lawn sprinkling might require no more than a couple of dozen gallons of water. One avocado used in guacamole requires 220 gallons of water to grow. Each pound of beef requires 5,000 gallons. Each ounce of chocolate sauce spread on ice cream requires 178 gallons of water to produce.


These are two key paragraphs from Kathryn Shelton and Richard B. McKenzie, "The California Water Crisis: Policing vs. Pricing?," one of the two Feature Articles for September.

In the piece, the authors give a sense of the magnitude of California's drought problem and, as the above two paragraphs suggest, lay out a simple solution: raise water prices.

Another highlight:

How low are water prices? Very! In San Diego and Los Angeles, cities with arid climates in years with "normal" rainfalls (10.34 and 14.93 inches, respectively), the price of water is significantly less than 0.7 cents per gallon (even after rising modestly by 8-10 percent over the past year). San Francisco, which gets almost twice the rainfall of San Diego and close to the average for the state (21 inches a year), has a slightly higher price but still below a penny a gallon. Such low prices hardly send a signal that water is as scarce, or valuable, as the governor says.


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COMMENTS (11 to date)
Dan S writes:

It's funny how easy it is to turn a failure-to-price problem into a left-wing cause. You and I would say, raise the price of water and/or groundwater pumping rights, but the internet is littered with headlines of the "STOP EATING ALMONDS; IT'S DESTROYING CALIFORNIA" variety.

Steve J writes:

Mind is blown that water in California appears cheaper than in Georgia.

vikingvista writes:

Unless they push for more appropriate pricing, it is very hard to take seriously either those complaining about water shortages, or those who claim to want people to employ water-conserving measures. That is, it is much easier to believe that such people are after something other than what they claim.

Jim Wilder writes:

@Steve J
It is also cheaper than North Texas - DFW area even though our average rainfall is 35 in/yr or so.

I work for a municipal water utility and have seen firsthand the resistance encountered to raising water rates even though they lag far behind the true cost of water (factoring in asset replacement costs and regulatory requirements). People will oppose a 5-10% rate hike which will only cost them something on the order $30-$40/yr but vote for a $50,000,000 convention center which has to be financed through bonds and will cost them probably $100-$150/yr increase in their property taxes. As long as the cost is "hidden" it is rarely considered.

Don Geddis writes:

Raising prices does indeed sound like the obvious idea. So why does it have no traction? My guess:

1. There's a "fairness" issue, and water can be life. If the rich guy buys up all the water because he likes playing golf on lush green grass, and then the poor mom can't afford anything to drink for her and her baby ... people would view that as unfair, regardless of whether the rich guy can afford it or not. Everyone has a "right" to a basic allocation of clean water (most people would say).

2. There is some existing water infrastructure (dams, canals), fed by rain/snowfall. If total use is below whatever the annual amount is this year, then the cost of delivery is extremely cheap. If total use is higher, then the marginal cost of additional clean water is much (10x? 100x?) higher. There's just a huge discontinuity in the ability to supply more water, which sends people to thinking about "how should we divide up the fixed amount of water we have", i.e. a liberal redistribution mindset, rather than a market-pricing one.

James Peron writes:

I have to wonder why our water bill, in California, averages $120 per month. No we aren't filling (or using the pool) because of the prices. Most our landscape is rocks.

It is one reason we are moving to a property with it's own well.

Russ Hooper writes:

It's really depressing that something as critically important as water is muddled up by price controls.

M Bell writes:

Water must be shared. Humans have not yet mastered sharing. Until we do know how to share, one jurisdiction suggests management of water by ensuring an allocation of the amount necessary for life for each person - or a reasonable life style (what does this mean?) then charge for discretionary use of water priced at whatever the market will bear. If not the market - then who or how will choices be made? To date, we are not aware of any workable water management system anywhere in the world.

(Municipalities charge for processing and distribution of water, not for the 'water' - as we understand it).

Hana writes:

Isn't one of the issues that municipal water is really not a fungible commodity? San Francisco receives their water from the Hetch Hetchy (Tuolumne River Watershed). As the recipient of that water, and it's primacy in the watershed, as compared to Lake Don Pedro or other downstream locations, isn't the allocation (water rights) given to the Bay area superior to all other users downstream? How then is a market price to be established? Water is all about power and politics. Wasn't Chinatown about California water?

On a side issue, I am somewhat skeptical of the Treehugger source data for water usage for crops. The article describes the quantity of water used to produce a pound of each of the foods. For instance 573 gallons for a pound of eggs? A large egg weighs 2 ounces (USDA source). So eight eggs would be a pound of eggs. And that takes 573 gallons? That is total B.S. Having raised laying hens, they consume approximately a pint of water a day, and produce one egg a day. I understand the implied concept of all water needs for the production of a product, but in at least this instance it's wrong. By the way the source of the source data waterfootprint.org doesn't even list eggs on its chart.
But the errors don't end there. Waterfootprint.org lists different numbers than those on Treehugger. Compare Lettuce, Tea, etc. on the primary source. This is disappointing.

David writes:

Having recently visited a desalination plant and also a water recycling plant in Southern California where the water produced is only marginally more expensive than the typical, piped-down variety, I think part of the problem is the political nonsense that has not allowed us to recycle and reuse the vast majority of water already in the system. The drought must not be that big of a crisis since we have already have a working solution that the government refuses to use.

Richard McKenzie writes:

I'd like to respond to two issues raised by readers to date. The first is that water pricing is avoided because water is critical to life, which I take from the comment, "water is life." I grant that water at some level makes life possible. After all, our bodies are about 70 percent water, but that hardly means that water use at the many MARGINS is crucial to life, even for poor people who should be expected to use a lot of water beyond what is needed for living at current water rates. Curbs in water use by higher prices will not likely threaten life as most Californians know it. Low-valued uses can be curbed.

The second issue relates to the amount of water embodied in various farm products, and many other products. I grant that I have given estimates (e.g., 220 gallons to grow an avocado) that are subject to variation across studies. I had no reason to doubt the accuracy of the estimates I gave (and certainly didn't judge the estimates solely by the name of the web site). My larger point stands apart from the exact count of gallons, which is that lawn sprinkling is hardly the only way water can be "wasted" and "conserved." A variation of an old adage applies: one person's "waste" is another person's "necessity." Pricing avoids giving water authorities the power to determine whose water use is superior (or inferior).

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