Tuesday, May 19, 2015

Using Economic Principles to Reduce Water Shortages

10/15/14 - Economics is all about supply and demand, cost and benefit analysis. Yet, when it comes to water, one of the world's most necessary goods, government subsidies and and reduced costs lead to people treating this resource as if it has an unlimited supply. In his article in the New York Times, Eduardo Porter discusses how treating water as a commodity could reduce the effects of the drought nationwide.

As with any product in a healthy economy, as price goes up, demand goes down, and as price goes down, demand goes up. Across the United States, water prices are very low. These low costs, combined with a high personal benefit, lead people to purchase more water, and thus consume more. It's one thing to ask nicely for people to reduce their water consumption, but a higher cost would be a more successful deterrent for many consumers.

The scarcity of water is not going to change. No matter how many icebergs are towed to land for human consumption, no matter how many desalination plants are built, we have a limited amount of water in the world. Water costs around the country are commonly reduced to a point at which water companies would be losing money if the government wasn't providing subsidy funds. But that isn't how it should be. If water cost more, people would be more careful about leaving a faucet running while doing dishes, or would think twice before deciding to drain and refill a swimming pool.

While many homes, even in the middle of a drought, pay a flat fee for their water usage each month, there are a few places, Irvine Ranch for example, that charge more money per unit of water as the number of units increases. Some states require the purchase of already-existing water rights from an owner of such rights before beginning a new building construction. In that way, only a specific number of people can own water rights at any given time.

According to Porter, farmers are the worst cause of water shortage in America, accounting for about 80% of the total national consumption at a fraction of the price of most consumers. Due the government's reduction of water prices for farmers, such farmers commonly perform “flood irrigation,” a process by which the entire field is flooded with water, in which much of the water goes to waste. While the actual, unsubsidized cost of an acre-foot of water might be $2000 and the sale price of an acre-foot of alfalfa that uses this water would be $920, which makes no sense economically, this is the way water is being used currently. If farmers were to be charged the actual cost of the water, they would realize that the benefit doesn't outweigh the cost.

Water is a necessity, but it is also a good. If prices are raised, if water is is treated economically, then people will be forced to reduce water use. In general, people understand cost-benefit analysis; we perform it on a daily basis. If wasteful usage of water were to lead to higher costs, then people would stop wasting it. While everyone likes low water costs and would likely be upset if those were to end, increased prices and reduced subsidies may be the only way for us to scale down the negative effects of this drought and any others in our future.

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