Water in California: Too Scarce, or Just Underpriced?

When it comes to rationing, give markets a chance.


You may have heard—and if you don't live out here you may not have cared—that "California has just one year of water left."

Claudio.Ar / Foter / CC BY-NC-SA

Alex Tabarrok at Marginal Revolution blog has a good roundup on why people think that, why it isn't necessarily true, and why ignoring price when it comes to rationing scarce things is a terrible idea:

California has plenty of water…just not enough to satisfy every possible use of water that people can imagine when the price is close to zero. As David Zetland points out in an excellent interview with Russ Roberts, people in San Diego county use around 150 gallons of water a day. Meanwhile in Sydney Australia, with a roughly comparable climate and standard of living, people use about half that amount. Trust me, no one in Sydney is going thirsty.

So how much are people in San Diego paying for their daily use of 150 gallons of water? About 78 cents. As Matt Kahn puts it:

Where in the Constitution does it say that the people of California have the right to pay .5 cents per gallon of water?

Water is such a small share of most people's budgets that it could double in price and the effect on income would still be low. Moreover, we don't even have to increase the price of water for residential or industrial uses. As The Economist points out:

Agriculture accounts for 80% of water consumption in California, for example, but only 2% of economic activity.

What that means is that if agriculture used 12.5% less water we could increase the amount available for every residential and industrial use by 50%–grow those lawns, fill those swimming pools, manufacture those chips!–and the cost would be minimal even if we simply shut down 12.5% of all farms.

Moreover, we don't have to shut down that many farms, we just have to shut down the least valuable farms and use water more efficiently. If you think water is cheap for San Diego residents it's much cheaper for farmers. Again from The Economist:

Farmers flood the land to grow rice, alfalfa and other thirsty crops….If water were priced properly, it is a safe bet that they would waste far less of it, and the effects of California's drought—its worst in recorded history—would not be so severe.

Even today a lot of CA agriculture uses the least efficient flood irrigation system.

According to data from the state Department of Water Resources, 43 percent of California farmland in 2010 used some form of gravity irrigation, an imprecise method that uses relatively large amounts of fresh water and represents a big opportunity for water conservation.

Indeed, in my experience discussing this around Southern California, people are quick to demand rationing to be imposed on all, while all too slow to embrace the most sensible way to get people to care about the water they use/waste and to ration minus punitive laws: to price it more rationally. (I've been engaged in many casual discussions about this matter with a cross section of California residents, and if they are not economics or libertarians, the matter of price doesn't in most cases even occur to them as relevant to this, except to possibly decry the very notion of charging for water—why, it is necessary for life itself. Screw Nestle!) But the cheaper something is, for farmers or households, the more likely it will be overused.

To too many people, "prices" are either voodoo or a means for the powerful to harm the less powerful. For those insisting on at least some accounting for "real need," lower prices for some understood (and necessarily somewhat arbitrary) amount of gallons for minimal drinking/cooking/bathing needs depending on number of people in the household and a much higher price for everything over that shouldn't be impossible in a world where water meters exist. 

But for certain things that people have decided you can't live without, the notion of a price mechanism seems to stir ancient feelings of taboo, and sense is flushed away. If you seem to be running out of anything, check your prices. 

Ronald Bailey explored some of the nitty-gritty details of California's weird system of water allocation last year.