Coyote Blog

In most commodities that we consume,  market price signals serve to match supply and demand. When supplies are short, rising prices send producers looking for new supplies and consumers to considering conservation measures.  All without any top-down intervention by the state.  All without any coercion or tax money.

But for some reason water is managed differently.  Water prices never rise and fall with shortages -- we have been told in Phoenix for years that Lake Powell levels are dropping due to our water use but our water prices never change.  Further, water has become a political football, such that favored uses (farmers historically, but more recently environmental uses such as fish spawning) get deep subsidies.  You should see the water-intensive crops that are grown in the desert around Phoenix, all thanks to subsidized water to a favored constituency.   As a result, consumers use far more water than they might in any given year, and have no natural incentive to conserve when water becomes particularly dear, as it is in California.

So, when water is short, rather than relying on the market, politicians step in with command and control steps.  This is from an email I just received from state senator Fran Pavley in CA:

Senator Pavley said the state should consider measures that automatically take effect when a drought is declared to facilitate a more coordinated statewide response.

“We need a cohesive plan around the state that recognizes the problem,” Pavley said at a committee hearing. “It’s a shared responsibility no matter where you live, whether you are an urban user or an agricultural user.”

Measures could include mandatory conservation, compensation for farmers to fallow land, restrictions on the use of potable water for hydraulic fracturing (“fracking”), coordinated publicity campaigns for conservation, increased groundwater management, and incentives for residents to conserve water. Senator Pavley noted that her hometown Las Virgenes Municipal Water District is offering rebates for customers who remove lawns, install rain barrels or take other actions to conserve water.

Pavley also called for the state to create more reliable, sustainable supplies through strategies such as capturing and re-using stormwater and dry weather runoff, increasing the use of recycled water and cleaning up polluted groundwater basins.

Note the command and control on both sides of the equation, using taxpayer resources for new supply projects and using government coercion to manage demand.  Also, for bonus points, notice the Senator's use of the water shortage as an excuse to single out and punish private activity (fracking) she does not like.

All of this goes to show exactly why the government does not want a free market in water and would like to kill the free market in everything else:  because it gives them so much power.  Look at Ms. Pavley, and how much power she is grabbing for herself with the water shortage as an excuse.  Yesterday she was likely a legislative nobody.  Today she is proposing massive infrastrure spending and taking onto herself the power to pick winners and losers (farmers, I will pay you not to use water; frackers, you just have to shut down).  All the winners will show their gratitude next election cycle.  And all the losers will be encouraged to pay protection money so that next time around, they won't be the chosen victims.

The first thing I do when I buy a shower head is make sure that the design has a flow restrictor ring (put in to comply with US law) that can be removed.  First thing I do after I buy a shower head is remove the ring.

If they want me to use less water, then raise the price beyond the ridiculously low prices we have now, prices that clearly do not match supply with demand.  It is not we consumers in Arizona that are draining Lake Powell, it is politicians who price water below any kind of reasonable supply/demand clearing price to gain some incremental love at the ballot box  (also, politicians prefer command and control legislation of the shower head variety to allowing the price mechanism to work automatically).  More here.

Apparently the next "crisis" is that America is running out of water.  This is mostly an issue in the west, where growth is high and fresh water is rarer than in the east.  Here is one example of the brewing panic:

The growing human population is creating cities where desert or scrub
land used to be. Rainfall always has been and always will be in short
supply. Only so much water can be diverted from rivers to satisfy the
water needs of these desert dwellers. The aquifers are being drained.
Soon there will be demands to divert water from large inland lakes like the Great Lakes which would put those bodies of water in peril.

Oh my god, I can see it now - fish flopping on the muddy exposed bottom of Lake Michigan.

Look, the problem is not lack of water.  The problem is lack of market sanity.  Water in the west is regulated and sold in a hodge-podge of complex arrangements and negotiations.   The whole system is too complex to describe here, but at least one general conclusion can be safely drawn about the whole system:  Water is under-priced.   

For reference, lets look at my home city.  If building cities in the desert is the new evil, then I live in that great Satan called Phoenix.  And while my electricity charges are enough to get my attention (higher efficiency AC: check; compact fluorescent bulbs: check; solar: still too expensive), my water bill seldom grabs my focus.   

And now I know why.  Check out this analysis, conducted apparently by the city of Austin but which I found on the Portland Water Bureau's web site:

Can you believe it?  We here in Phoenix, out in the middle of the largest desert on the continent, during a multi-year drought (yes you can still have a drought in the desert), while everyone laments that Lake Powell and other reservoirs are getting sucked dry, Phoenix has one of the lowest water prices of any city in the country.  Can you get over the irony of Seattle having some of the highest priced water in the country and Phoenix the lowest?

And you know what - I have not seen a single article in any of our local media that has once mentioned this fact.  Look here -- the articles blame global warming and lack of conservation and development and too many lawns and not enough low-flow faucets and talk about the need for government rationing, but never once mention PRICE.  We have the scarcest water in the country and one of the lowest prices for water.  Talk about ignoring the elephant in the room.  I should have just labeled this post "Duh!"

And these are the consumer water prices.  The situation actually gets worse when you look at agriculture.  In most of the southwest, farmers get water prices subsidized below the rates paid by ordinary consumers.  When you combine these water subsidies with massive subsidies already rich groups get for growing crops in the desert from farm programs, you get an enormous distorted incentive to grow water-hungry crops that are totally inappropriate for the desert.

So here is my five minute plan:  We may be a ways away from creating an actual market in water, but in the mean time, the quasi-governmental agencies providing it need to raise the prices (to everyone) up to a level that demand matches supply.  More conservation will occur, and marginal commercial, residential, and agricultural development will disappear.  If the price goes high enough, someone may even go out and find a new, innovative source of water for the area. 

Unfortunately, this is just too dang easy, and, from reading recent articles in the media, not even in the menu of options being considered.  Government bureaucrats are much more comfortable with rationing and limitations on development, because it gives them more power and creates a new set of winners and losers who will donate more to future political campaigns.

Update: Daniel Mitchell at Cato has similar thoughts, based on water shortages in Florida of all places:

So here we are, in the spring of 2007, with rain below
average, with a low lake level, little else in the way of reservoirs,
and a water shortage. What is the response? Well, a rational response
might be to price a scarce commodity such that people will use it only
as they need it, and not frivolously. "¦Instead, we get the response of
the local commissars. So, not allowing the market to work, and not
allowing prices to provide signals to the participants, they have
decided to run our lives for us.

"¦I live at an odd numbered address. That means that if I want to
water my lawn, I can only do it on Monday, Wednesday and Saturday
mornings, from four to eight AM. I can water my plants with a hose on
the same days, but only between five and seven PM. My neighbors across
the street, and behind my house on the next block, get Sunday, Tuesday
and Thursday.

"¦Over thirty years ago, in the first OPEC oil embargo, the
government, rather than allowing prices to rise to account for the
reduced supply, told people when they could purchase gas based on the
parity of their license plate "” even one day, odd the next. My
recollection was that this did nothing to alleviate the shortage "” the
lines remained. The problem was only solved when Nixon-era price
controls on oil were lifted, the market was allowed to work, and oil
prices eventually (and it didn't take all that long) fell to historical
lows.

"¦[H]ere's a radical concept. How about pricing the commodity to the
market? Maybe, if people had to pay more for water to water their lawn,
they'd use less of it? Yes, I know that it's hard to believe, but there
really are some people out there who buy less of something if the price
is higher.

Update #2: The more I think of it, the more this situation really ticks me off.  In their general pandering and populism, politicians are afraid to raise water prices, fearing the decision would be criticized.  So, they keep prices artificially low, knowing that this low price is causing reservoirs and aquifers to be pumped faster than their replacement rate.  Then, as the reservoirs go dry, the politicians blame us, the consumers, for being too profligate with water and call for ... wait for it ... more power for themselves, the ones whose spinelessness is the root cause of the problem, to allocate and ration water and development.