Sunday, October 26, 2014

The realities of water pricing

The New York Times article "The Risks of Cheap Water" provides a fascinating overview of the water crisis in the USA, with an emphasis on the situation in California.

California is an extremely productive agricultural state. Thanks to its climate and soil, it has a comparative advantage in producing certain  fruits and vegetables. Unfortunately, it's water resources are exploited and used in an unsustainable manner. As the NY Times article correctly argues, part of the reason for this is inefficiencies in the water pricing structure. Currently,  water prices are too low and do not cover infrastructure maintenance nor do they take into account negative externalities. As it is, the prices provide no incentive to conserve water.

Water pricing is a politically sensitive topic. This is unfortunate as prices are one of the most efficient ways of allocating resources. They are definitely more effective than laws, and are more likely to provide the desired result.

Part of the reason is that water is essential for life and the general public and politicians often conflate an increase in the price of water with denying people access to water. This is untrue.  The UN estimates that each person needs a minimum of 20L of water per day to meet basic physiological and social needs.Those first daily 20L per capita are very valuable, and very few people (even cold hearted economists) would argue for a system that makes this amount of water unaffordable.

There are ways to avoid this. A proven way is to use an increasing block rate payment structure.In truth however, spending political capital on changing the structure of water prices charged to private individuals is not the most efficient use of time.  The Californian agricultural sector accounts  for roughly 62% of water usage in the state (estimates vary based on data source and analysis). Thus, changing prices charged to this sector will have a more significant impact on conservation efforts.

Because of this year's record drought, prices have already increased. In some areas of California, farmers are paying ten fold what they did the previous year. As California farmers produce approximately half of the fruits and vegetables consumed in the nation, there is a likelihood this increase will reverberate in food prices. And while water prices are a heavily politicized issue, food is a given political tangle. Thus, water pricing is likely to get even trickier than it was.

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