California, Water, and Markets

California is currently facing a massive drought. The situation has gotten so bad the governor has issued a ban on excessive residential water use.  But is there a better way?   Yes: markets.

Remember that prices are signals.  They indicate the relative surplus/scarcity of a good.  When a good is relatively scarce, prices would naturally rise; conversely, when a good is relatively abundant, prices would fall.  Water is currently relatively scarce in California.  In a free-floating price system, the price of water would rise.  The problem is California is not allowing prices to rise.  This actually perpetuates the water scarcity as there is no incentives for residents and businesses to conserve.  Furthermore, a ban of excessive water use doesn’t do anything to address this problem, either.

The ban issued by the government only applies to residents and some businesses.  Many firms, including agriculture (where the majority of water usage occurs) are exempt from the limits.  In terms of combating relative scarcity, this method will, at best, have a minor effect.  Prices, in contrast, fall upon all users of the goods, not just the un-politically connected people.  If prices were allowed to rise for everyone, then the incentive to conserve would fall upon all: businesses, municipalities, and residents alike.  These economic actors would have to look for ways to curtail their water use, allowing them to, naturally, adjust to the relative scarcity of water.

Another bonus of rising prices that will not come from a ban is innovation.  As prices rise, firms and individuals will look for ways to maximize their water usage while minimizing the costs.  This can lead to innovation.  Farms may look toward methods that use less water for irrigation (such as no-till farming).  Individuals may look to replace old, leaky plumbing with newer, more efficient equipment.  As long as prices are held artificially low, there is less of an incentive for this innovation to occur.

California needs to look toward a decentralized, “bold and persistent experimentation” method to solve this water crises, rather than a one-size fits all solution.  That can only be delivered by a market for water.

 

3 thoughts on “California, Water, and Markets

  1. Absolutely, Jon, a market in water would provide enough water to everyone, everywhere.

    Water is a renewable resource that is constantly recycled from the oceans to land in the form of rain, in amounts greater than people will ever need. It is government controlled monopolies of water provision that causes shortages, as you pointed out.

    I have been hearing for as long as I can remember that there is no way for cities like Phoenix and Las Vegas to grow larger because they are in the middle of major deserts, and there is insufficient water. Somehow they have done so anyway.

    Neither of those cities has a natural supply of gasoline either, but the market has provided as much as is needed at relatively reasonable prices via pipelines. The same could happen with a free market in water as well. (ooh a pun)

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  2. Is there not a market of sorts? Those who cannot get as much water as they need are free to buy it by the tankerful as far as I know. True it is not ideal, but water is available presumably. And I don’t think that anyone in California thinks the agriculture industry should be destroyed for the sake of watering the lawns and golf courses of the wealthy. Shades of Irish potato famine there.

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