California, where I live, is in the midst of a severe drought, with 2013 being the driest calendar year in the state’s history. Naturally, people are distraught over all the implications, from agricultural irrigation to effects on wildlife habitats to personal home use. The prevailing reaction has been a call to conservation and up until recently that has largely been a voluntary statewide initiative. Guilt and public shame, it has been hoped, would be enough to dissuade a wicked and greedy overconsumption of water.

This, apparently has not been enough, as status quo usage is wildly unsustainable, and on July 15 the State Water Resources Control Board and Governor Jerry Brown approved measures that will allow law enforcement to issue fines of up to $500 per day for households that are visibly wasting water. Unacceptable behavior include hosing off sidewalks and driveways, irrigating laws to the point of visible runoff, washing cars without a shutoff valve on the hose, and using potable water in non-circulating fountains. Additionally, municipal water agencies are tasked with implementing further restrictions or else risk incurring a $10,000 fine.

Firstly, let’s recognize that this is a patronizing and abusive reaction to the problem. Water is a commodity, an important one, but a commodity nonetheless that people pay money to acquire and consume. State officials are saying that if individuals pay to consume more that they will send agents to coerce a not insignificant monetary tribute and publicly humiliate the apparently loathsome water wasters. Not even that, as total water consumption, at least at the state level, is not being monitored. Families that time their showers, cut back on laundry, and never flush yellow can be hit with a fine if a sprinkler partially waters a paved walkway. It’s wholly arbitrary.

Secondly, as a student of economics, I can see that this policy will do little, if anything, to ameliorate the water shortage crisis. Outdoor household water usage, even lawn watering, constitutes a small fraction of water use in the state. The vast majority, 80-85%, goes toward agricultural irrigation, particularly in the central valley.

California is a very dry state, even in “non-drought” years. Most of our water is relocated from Sierra Nevada mountain runoff, the Colorado River, and groundwater via a complex system of pumps, siphons, tunnels, and aqueducts. The state controls all of the water distribution, and so much is sent to the arid central valley because agriculture has become an enormous part of the California economy; totaling 8% of the nation’s output. The valley is able to sustain this output, which would be impossible under free market circumstances, because the water supplied to the farmers is heavily subsidized by the federal government.

The Economic Solution

“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”

–       Thomas Sowell

The subject of economics stems from the concept of scarcity. If we lived in a world without scarce resources, there would be no economics as there would be no reason to economize. There is no economy, for example, in Heaven.

Scarcity does not refer to rareness; all resources are scarce, even if they are abundant. To understand scarcity is to recognize that all resources are finite and have alternative uses and that our various and changing values and preferences dictate how these resources are used and not used.

Two important scarce resources are time and money. We each have innumerable options for how we can use our time and money, but we can’t spend it on everything that we want at all times. We must make choices, and to do so we evaluate the costs of various choices relative to others. When a choice is made on how to use a resource, we refer to the cost of the next best choice as the opportunity cost.

We currently have a water shortage in California because the demand for water far outweighs the supply available. Shortages such as these are almost always a result of government or some other coerced intervention into the market. From an economic perspective, there are no shortages in a free market. As Murray Rothbard explained during a similar water crisis in the 1970s, a shortage is “a condition where a purchaser cannot find supplies available at the market price.” That is to say, shortages occur when the price of a resource is low enough that the cost to the purchaser is lower than the opportunity cost for other resources, creating high demand, but the supply is too low.

Shortages have little, if anything, to do with the material quantity of a resource. Rothbard uses the analogy of paintings by the artist Rembrandt. Rembrandt paintings, compared to many other desirable resources, are exceedingly rare, and yet, no one ever complains about a “Rembrandt shortage”. This is because the price of a Rembrandt is tremendously high, so much so that most people don’t ever consider obtaining a painting as they judge the opportunity cost for a multitude of other uses of their money to actually be higher than the cost of the painting. Suppose the government declared there to be an insufferable degree of “Rembrandt inequality” and to make the paintings available to more people they decreed that the selling price of one should not exceed $1000. At that point there would be an immediate shortage of Rembrandts. Note that under this scenario, the available supply of paintings does not change. A shortage develops from a discrepancy between supply and demand in which prices are restricted from serving as a clearing mechanism.

Intrepid readers will no doubt by now understand with clarity the solution to California’s water shortage. The price for water usage must be allowed to rise until supply and demand are equalized. The price of water is being held artificially low and people are incentivized to use it in unsustainable amounts. An important function of prices is that they serve as signals for relative supply and demand. We don’t need condescending appeals from our “superiors” in Sacramento or punitive remonstrations. When the price of water raises everyone gets the message loud and clear and they voluntarily decrease their consumption as they reevaluate opportunity costs and choose to spend their money on alternatives uses.

The common responses to this proposal are predictable and uncritical. “Farmers need the water for their crops! Do you want them to lose their livelihoods? Do you want people to starve when they don’t get their vegetables?” “What about poor people? They won’t be able pay the higher prices and will suffer!”

Farmers in the central valley who get low-cost, subsidized water are responding to distorted price signals. The water is low in supply but the farmers behave as if the supply is abundant because that is what they are being told by the price. This incentivizes inefficiency and waste. Their money is being misallocated and a market correction is desperately needed to repair the harm that is currently being done.

Often, when prices go up, individuals who don’t want to pay the higher price respond with accusations of corruption or greed, but this is generally self-serving and betrays a willful ignorance to reality. The water is already expensive; it is so because demand is far greater than supply. When prices are allowed to rise to their natural state, they serve as a means of rationing a resource toward those uses that are most valued. When the prices are suppressed, there simply must be some sort of non-price rationing, which in the current discussion comes in the form arbitrary water cutoffs to some farmers. To these farmers, the price of water is very expensive; in a way, they are paying the full difference between the subsidized price and the market price.

If the prices were allowed to rise naturally, farmers would be pressured to make choices that they wouldn’t otherwise consider as they wouldn’t be worth the effort, time, or money. These might include new efficient irrigation techniques, changes in crops that are more suitable to the environment, or moving the farm to locations that receive higher rainfall. Our nation would not be in danger of food shortages (in fact, we already grow a tremendous excess, as do many other countries) as we would just shift production to better align with prices. The transition would no doubt be uncomfortable, but it would not be calamitous.

Individuals and households, including poor ones, would also align their usage to the new prices and would voluntarily conserve. Poor people would not see their total bill go up as they would simply decrease their consumption. As average California households use an estimated 360 gallons of water per day, there is a lot of room for conservation. And this without the moralizing or thuggery that we are currently being subjected to.

Governments create shortages when they meddle with prices, whether it is shortages in healthcare providers by artificially lowering costs or shortages in banked blood by denying monetary compensation for donation or the shortage of housing in many cities due to rent control. In California, it’s either going to start raining and snowing more, or it’s not, so hoping for rain or complaining about global warming is not going to do anything. The best solution to the problem would be to break the government monopoly on water resources and allow the free market to dictate prices that align with the actual supply and demand of water. The perception of water as a “right” and not correctly as a resource or a commodity has created a tragedy of the commons scenario in which people are overconsuming. If the government must be in charge then we all must understand that the only way to avert an economic and ecological disaster is to raise the price of water and then adapt to the changes that this will engender. As resourceful as we Americans are we should be confident that this is not an insurmountable task.

Notes

The Murray Rothbard piece I mentioned in the article is an excellent analysis of the water shortage in California in 1977 and I highly recommend reading it.

In this article from Mises, Kathryn Muratore goes into more detail about the current california water crisis and here is an article from Ryan McMaken, also about the current shortage.

In this article from 10 years ago, economist Thomas Sowell, who I quoted in the article explains the connection between subsidies and shortages. Also, you should check out his book Basic Economics, which helped me to recognize the economic hokum behind California’s new fines.

In this article we can witness the craven incompetence of bureaucrats as a California couple, worried about conservation, is slapped with a hefty fine for letting their lawn get too brown.

  • Michael Conrad II

    Well said. and well reasoned! I look forward to reading more…