March 13, 2015

How Market Prices Could Help Solve Drought Problems

Recently the Santa Clara Valley, CA, Water District sought to raise drinking-water rates by 31%. Facing angry consumer reaction, it lowered the hike to 19%.

You might at first think, “Good! People need drinking water!” But wait. It’s not quite that simple.

Last year California experienced a severe drought, making less water available for irrigating farms and orchards and for residential and industrial use. As a result many acres were left idle, including some planted with high-value fruit and nut trees. Yet, thousands of acres were planted to alfalfa, a low-value crop that is exported.

Arid regions like the western US cannot avoid periodic droughts, but if they used market prices to ration scarce water they would be able to better satisfy the most urgent needs of state residents.

Water law in the western US is governed by complex rules that make it difficult to buy and sell water at market prices. Farmers who irrigate benefit from large government subsidies that cover most of the costs of maintaining dams and pumping the water.

Some people object to charging market prices for something as essential as water. Some crops would become unprofitable. If farmers were permitted to sell subsidized water rather than using it to irrigate their farms, some could earn substantial profits at taxpayers’ expense.

But farmers who use subsidized irrigation water are already profiting at taxpayers’ expense. Scarce water used to irrigate low-valued crops cannot be used for much higher-valued uses – crops or otherwise. Because of the recent drought, five hundred thousand acres of crop land were left without water, including some orchards where trees died for lack of water. It would be a good thing if those growing low-valued crops, like alfalfa, were free to sell their water to orchard owners, who are willing to pay a high price to preserve their orchards. The difference in price and the profits that could be earned provide an incentive to use the water to produce what consumers value most highly.

Urban dwellers are willing to pay more than most farmers pay for their water. Thus it makes sense for farmers to sell some of their water to city water systems. If urban dwellers are required to pay a market price for water, they too will be careful to conserve it. Because many homeowners pay too low a price for water, they use more water than necessary, in spite of government efforts to promote conservation. A better way to encourage conservation while still making sure water is affordable to the poor is to charge low prices for using a moderate amount of water and high prices for additional consumption beyond what is enough for basic family needs.

Market prices for water can even benefit wildlife conservation. If people value wildlife and that wildlife needs water to survive, managers of wildlife refuges will be willing to buy water from farmers so that more water goes to lakes and wetlands and less to irrigation.

The best way to encourage the conservation of water, or of anything else, is to charge a market price for it. This will motivate urban dwellers to limit how much they wash their cars, water their lawns, and even flush their toilets, while motivating farmers to be careful how much irrigation water they use and to use it only for the highest-valued crops.

Of course such solutions take time to implement, but if you care about the environment and the poor, consider participating in the Cornwall Alliance Day of Prayer for the Environment and the Poor. Just click here to learn about this effort, receive a prayer guide, and sign up for a particular prayer time. And when you pray, include a request that lawmakers and the public come to understand the importance of charging market prices to encourage the wisest use of scarce resources.

Tracy C. Miller, Ph.D., is Associate Professor of Economics at Grove City College, Grove City, PA, and a member of the advisory board of the Cornwall Alliance for the Stewardship of Creation.

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