The Magazine

Flood Zones

A market solution to the challenge of water supply.

Jul 16, 2012, Vol. 17, No. 41 • By G. TRACY MEHAN III
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No observer can ignore the news reports of searing drought in Texas, the competition for limited supplies of water among the booming cities of the Colorado River basin, or even the recurrent conflicts among Georgia, Florida, and Alabama, which rise and fall in intensity and duration almost in tandem with the rate of precipitation and the water level of Lake Lanier, a major source of supply for Atlanta.

Water

These controversies are purely political and legal battles, without any solid economic thinking or policy being brought to bear in a way which would limit acrimony and allocate water fairly and efficiently while satisfying the needs of both human beings and the environment. Part of the problem is that many (if not most) economists write for each other—using a language foreign to almost everyone else, including those for whom economic thinking would be of tremendous benefit in the management of our water resources: engineers and politicians.

So here is a succinct, articulate book from a newly minted Ph.D. who explains the beneficial role of economics in encouraging wise stewardship and social harmony in water and waste-water supply and provision. David Zetland believes the nub of the matter is that water is priced, at best, based on the cost of delivery, without regard to scarcity. Water and wastewater systems are natural monopolies and, in the United States at least, primarily a government-run business. Politics, not markets, drives the price of the commodity delivered or the service rendered. 

Indeed, elected officials tend to avoid robust pricing, fearing voter backlash and allowing for overconsumption, or even backsliding, in terms of maintenance. (The managers of the system serving the nation’s capital are trying to implement pipe replacements on a 100-year schedule, which would be an improvement over the 300-year cycle that is presently the norm.) And Zetland may be understating the problem since many, if not most, water and wastewater systems are not even achieving full-cost pricing—which would cover debt, operations, maintenance, and long-term capital replacement. Many systems are used as cash cows to support more labor-intensive functions of local government, such as fire and police. 

Getting the prices right, for the cost of delivery as well as the scarcity value, can solve both infrastructure and supply problems. Take the case of Santa Barbara, California. In the early 1990s, after several years of drought, Santa Barbara saw its reservoir shrink. Limits on lawn watering and car washing were imposed. Then the water agency instituted steep, increasing block rates resulting in prices 200 percent higher at the upper rates of water usage. “The impact on changes in behavior and aggressive price penalties was fast and significant. .  .  . Median monthly consumption dropped from 25 to 17 [cubic meters] per month,” writes Zetland. And the consumption levels stayed low: “After the drought ended and prices were lowered, consumption was still only 60 percent of pre-drought levels.” 

There are also long-term savings to ratepayers which Zetland does not dwell on, but which are real nonetheless. Using less water means using fewer chemicals and less energy. It also results in less capital investment over time, since less capacity is required. As readers of Marc Reisner’s Cadillac Desert (1986) will appreciate, government subsidies, without requirement of any payback by end-users,result in countless water projects which do not withstand any serious benefit-cost analysis, and can produce needless environmental harm. By relieving users of the incentive to conserve or manage their water use, such subsidies encourage overconsumption usually by the most effective rent-seekers who know how to work the political process.

The dirty little secret of our water “crisis” is that many of our water shortages derive from what Zetland aptly terms “lifestyle water,” such as the “Scottish lawn” in Southern California, accounting for more than 50 percent of residential water consumption in the area. This is in addition to the water used for swimming pools, golf courses, and water parks. “The economics of lifestyle water are simple,” he argues. “We use the water for fun, so we should have to pay the full cost of that fun, including the cost of scarcity.” There is nothing wrong with green lawns, pools, and golf: You should just pay for these amenities. And if residents of Phoenix must flood—yes, flood—their lawns for aesthetic reasons, they should pay for the privilege. “Don’t blame the consumer who over-uses cheap water. Blame the monopoly water provider that sets a low price,” writes Zetland.