Thursday, November 18, 2010

Water as an Economic Good

There are many out there that claim the solution to our water scarcity is an economic one - simply price water appropriately and society will collectively begin using it sustainably.  In pricing the water, suggestions have been to price it in terms of its replacement and delivery costs - not only its delivery costs.  Seems to make sense at some levels, but...

It's never clear whether these proponents are suggesting one price for all water, or, variable pricing for different water uses, or who would set the prices, by what convention.  I can't see how a single price can possibly work for all the various usages, so I hope this is not their goal.  And if every use type has it's own pricing, how is that any different than what we have today - other than the fact that everyone's water will get more expensive under such a plan - a lot more expensive. 

In our part of the world (a groundwater management district where 97% of the total regional water use is for irrigation) pricing irrigation water to cover replacement costs would be so prohibitive that all irrigation would cease immediately.  Moreover, all the costs of delivery have been and will be individually paid for by the appropriators.  There is no single unit responsible for water delivery.  And just pricing water appropriately for domestic and municipal use would be so fruitless here that it's actually a bit scary.   Could it be that the proponents of "appropriate water pricing" are actually aware of this and the whole idea is actually a euphemism for "let's eliminate irrigation"? 

I can see some cases where more appropriate water pricing could be effective in reducing water use, but even in these cases, the reduced water use would still exceed sustainable supplies, so the economic solution would be no long term solution at all - just a bandaid.  I have to ask what the appropriate pricing of water needs to be to reach sustainable water use?

Some have suggested an all-in auction as a way of deriving the appropriate pricing and setting the appropriate goal.  Great idea if you have the money to play and the water value is not excessively high and everyone has to play.  I submit that agriculture will rarely have the money to play and will thus lose water-standing significantly - if it decides to play at all.  In Kansas water rights are personal property rights to the use of the water.  As such, I don't see how they can be forced to participate in the auction.  If this is the case, how can an auction be run when and if 97% of the universe is not enrolled?  

If anyone can show me how appropriate pricing will work on a large scale, over all the water uses, to achieve a sustainable water use level in a fair manner (everyone participating from an equal vantage point) I'll be happy to champion their cause.  And maybe they're all right and I just don't get it!


  1. Hi Wayne:

    (1) if your goal is "what the appropriate pricing of water needs to be to reach sustainable water use?" then you have to cover fixed costs first (done) and then set a price that depends on your definition of sustainable. If that means maintain water tables, then it means no pumping in the Ogallala. But you can set a price to maintain a target overdraft rate, which is the way the Ogallala has been managed for years (as far as I know)

    (2) All in auctions RE-allocate water among a certain user group, so farmers would be bidding against farmers quite often. Net buyers wouls use more water and transfer more money to net sellers. More here:

  2. David:

    Thanks for the comment. I have spent some time reading your work on an all-in auction as a possible solution to re-allocating scarce water supplies in the Metropolitan Water District, but have to profess insufficient knowledge of California water institutions to make any correlations what-so-ever of your ideas and concepts to the Kansas situation I do know. Perhaps I'm being far too literal!

    I am encouraged to hear that farmers would be bidding against other farmers, etc. This makes more sense, but I didn't get that from my readings thus far. And, you say this would be so "quite often", which to me means that it is not necessarily a requirement. I'm still struggling a bit with scale and surmising where the limits could actually end up. Scary stuff when you don't know the possible limits!

    I see your point on the pricing for managed overdrafts, too. You are correct that this has been the management style anyway, so having this flexibility eases much of the anxiety.

    Thanks again, I'll continue looking at it. Wayne.