Water, Water Everywhere

This morning at Cafe Hayek, Don Boudreaux writes on water, responding to a radio program describing water as “our most precious resource.”  Don says (emphasis added):

While it’s true that water is a scarce resource, it is simply untrue that water is a precious resource.  Potable water is sufficiently abundant today in most places where human beings live that it can be acquired at a low price.  Indeed, given modern techniques for delivering and safely storing potable water, water is widely available today even in some desert areas, such as Las Vegas and Tucson.  And while I don’t defend (quite the contrary!) government subsidies that make water more available where and to whom it would be less available, it remains silly-talk to say that water is “our most precious resource.”  The market price of water testifies powerfully to the contrary.

Don’s comment is true for most of the US.  But what about places it’s not?  Third-World countries and the like?  Why is it we can produce water in Las Vegas, Phoenix, and Tucson, but not Venezuela, Zaire, and Somalia?  It’s clearly not the environment; the US has harsh deserts and tundras and yet no water issues (in fact, water to spare!).  I suspect it has more to do with the free market institutions of the United States that allows us to bring water everywhere.  There’s a lot of private water here (think bottled water).  It is sold (mainly) at market prices, so places that have abundant water (like Maine) can bottle it and sell it to Arizona, where it is more scarce.  The areas where there are no functioning price systems and lots of trade controls (like Venezuela, Zaire, and Somalia) are facing water crises.

In short: water is precious in places where it is not treated as a commodity (and, in some cases like Venezuela, called a “right”).  It is abundant in places it is treated as a commodity.

Toward a Better World

According to the organizers of Earth Day: “Education is the key to advocacy and advocacy is the key to change.”  I agree.  Toward that end, allow me to explain why free markets, and in particular secure private property rights, help make the world a better, cleaner, and more environmentally friendly place.

Property rights are important because they encourage the owners of that property right to maximize the property’s uses.  Property rights do this by having the owners incur the costs of their property (its upkeep, its development, etc), but also confers the benefits onto its owner; in other words, the greater concentration of costs and benefits means each person’s success is dependent on his/her activities.  As such, the property owner is incentivized to minimize costs and maximize benefits over the life of the property.

While there are many kinds of property rights, the type of right matters for environmentalism.  Contrary to many popular claims, public ownership of natural resources (national parks, nature preserves, and the like) may be counter to the goals of environmentalism; in other words, state-produced environmental efforts may make the situation worse, not better!  The reason for this is the incentive may not be as strong to maximize effort on the part of the property owner.

Allow me to explain by way of paraphrasing an example Armen Alchian gives in his 1965 Il Politico article Some Economics of Property Rights:

Suppose there is a community with 100 people in it, and 10 enterprises.  Further suppose that each person, by devoting 1/10th of his time to some enterprise as an owner, he can generate a gain of $1,000 for the enterprise.  If ownership of each enterprise is divided equally among the populace (that is, all the enterprises are “publicly owned,”), then he will produce a gain of $100 for himself each day (1/100th part owner and 10 firms) and the rest of his product ($9,900) going to the other members of the community.  If the other 99 people in the community act the same way, he will get $9,900 from them, bringing his total wealth gain to $10,000.

Now suppose that each person owns 1/10th of a single enterprise.  The individual now works to produce $10,000, of which he keeps $1,000 and the other $9,000 goes to the other owners.  If the other owners do the same, all end up with $10,000.

If we go to the extreme end and each enterprise is owned by a single person, then he gets to keep all $10,000 of his own hard work.

As we can see, in each case above, the reward to the property owner depends partly on his own effort and partly on the effort of others (except the last option).  In the first of the cases, the incentive for him to maximize his efforts is minimal: no matter how hard he works, he’ll only get $100 direct benefit from it.  The other $9,900 must come from someone else who may or may not have the same work ethic as him.

So, if a person is most incentivized to act when s/he absorbs the costs and the benefits, how will that help the environment?  Well, it’ll help by incentivizing the person to keep their property in working order.  A person who owns a home will do her best to keep the house neat, to keep the fixed costs (heating, cooling, water, etc) low.  They may, if they have time and money, plant a garden or maintain a yard in order to keep the house pretty.  Larger groups with common goals could pool money to maintain a park.  Firms, seeking to minimize their costs, are constantly looking for ways to reduce waste and increase output.  Owners of farms, of mines, and the like are always looking for ways to extend the life of their sources of wealth.

In short, people will look to take care of their own little plot of the world.  Environmentalists often urge us to “think globally, act locally.”  I can’t think of anything better than property rights to accomplish this task.

There are objections some might raise to the above discussion, and those I will address in another post as this one, at nearly 700 words, is already too long.

Earth Day 2017

Today is Earth Day.  Protecting and improving the environment is a big thing for me; in fact, it is one of the many reasons I love free markets.  One of the major champions of free market environmentalism is the Property and Environment Research Center (PERC) located in Bozeman, Montana.  I highly recommend checking out their blog and publications.

In the interest of full disclosure, I have no financial ties to PERC, but there are academic ties.  One of my professors, Thomas Stratmann, is a senior fellow.