“People differ dramatically in their subjective evaluation of goods and services, and water authorities cannot know these evaluations.” C alifornia is facing a water crisis of historic proportions. Water reservoirs in parts of the state are drying up. Lake Mead is less than two-fifths full, a record low, and is falling. The snowpack in the Sierra Mountains remains a fraction of what it was years ago, and aquifers from which Californians draw a major share of their water are being depleted. Vast acreages of crops have withered; many acres of rich farmland in the Central Valley (and elsewhere) are going unplanted; and truckloads of cattle are being shipped to rendering plants or out of state for grazing. The economic costs of the current water shortage are piling up by the week. A senior water scientist for NASA’s Jet Propulsion Laboratory observed that the state’s water problems are just short of dire: “It’s time for us [Californians] to wake up. If this drought continues, we’re going to be in a terrible situation within the next 12-24 months.” Most commentators blame the water crisis on the drought. Yet an unappreciated cause of the water crisis is that most Californians pay so little for water that they do not know the price and, thus, have little incentive to heed the governor’s appeal to cut their water use by a fifth. As a result of low prices, many communities have resorted to restrictions on water use, enforced with heavy fines for water “waste”—but only for easily monitored violations (e.g., lawn sprinkling). A far more effective means of alleviating the state’s water shortage would be to raise the price of water aggressively, until Californians have reason to conserve in numerous ways that can’t be known to water police. Higher water prices would also be far more effective than water-use restrictions in reducing the economic damage from the state’s ongoing drought. Drought, Water Prices and “Crisis”

Water has long been a scarce and valuable resource in California, mainly because a sizable portion of the state is arid—some of it desert. Even a temporary decrease in rainfall in the state’s rainy season, which typically extends from mid-November to mid-March, can strain water reserves, especially since agriculture soaks up three quarters of all water distributed to users in the state. When the annual rainfall is well below the state’s historical average, as has been the case for years, a “water problem” can become a “water crisis”—especially when governments do not allow water prices to rise. When asked to explain the state’s water crisis, which is looming ever larger by the week, many Californians give what they consider to be the obvious and definitive answer: “It hasn’t rained very much in California.” There is some truth in that response, of course; 2013 was the driest year on record for the state, with Los Angeles receiving only a quarter of its average rainfall over the last year. However, this assessment misses a major reason why the governor has appealed for conservation. This year, water use statewide has actually increased by 1 percent. Why have the governor’s conservation appeals not worked? Many Californians simply don’t have communitarian concerns sufficient to respond to the governor’s water-crisis laments. Low water prices, along with its continuing flow, has many thinking there’s no water scarcity: “What, me worry?” Moreover, Californians can individually reason that their water use (and non-use) is the proverbial drop in a very large bucket. Thus, they assume that their individual conservation will have no detectable effect on the overall shortage—a line of reasoning that impairs the incentive to conserve. Therein lies the so-called “tragedy of the (water) commons:” when one person conserves on water, he leaves more for others, who will overuse, and therefore does not bother conserving himself. This can leave all Californians headed to a state of water depletion (or a dire crisis). “Water Police” and “Water Ninjas”

To achieve water conservation needs, the Southern California Water Committee has created a marketing mascot, “Lawn Dude.” It is designed to be a “sassy character” that resembles the Cabbage Patch Doll of the 1980s and spreads child-level conservation slogans. More substantively, a growing array of water authorities have begun imposing mandatory and somewhat easily monitored water-use restrictions on washing cars, hosing driveways, and sprinkling lawns. “Water police” will roam neighborhoods to enforce the restrictions. Since the water police cannot be all-seeing (at this writing, Los Angeles, with 4 million residents, has only one water cop), water authorities are encouraging neighbors to snitch on one another, with the intent of fining offenders as much as $500 a day (with some neighbors reportedly snitching on one another to extend their feuds). Self-appointed “water ninjas” have started prowling Orange County streets, snapping pictures of “water waste” and “shaming” offenders with internet postings. One Wall Street Journal reader sarcastically quipped, “I sense a new reality program… ‘Lawn Police!’ Watch as neighbors narc on neighbors and violence ensues!” An Unheralded Culprit: Low Water Prices

The popular explanation for the water crisis—lack of rain—is clearly inadequate. The state is facing neither a Snickers crisis nor a Mercedes Benz crisis. Candy aisles in all stores are nicely stocked with Snickers, and Mercedes Benz dealers have lots full of new models. There has been at least a modicum of rain over the last year, but there has never been a “rain” of Snickers or Mercedes. So why the threatening problem in water? According to Pepperdine Policy Professor Wade Graham, “The state uses enough water in an average year to support, in theory, 318 million Californians, more than eight times the actual population of 38 million,” mainly because three quarters of the state’s water is used in agriculture, with many farmers flooding their fields that could be watered more sparingly with irrigation systems. But why do Californians use so much water? An underappreciated explanation is simple: Water prices have been held down below cost by political forces and by past water infrastructure subsidies covered by taxpayers across the country. As a result, many Californians may see low prices as a birthright. How low are water prices? Very! In San Diego and Los Angeles, cities with arid climates in years with “normal” rainfalls (10.34 and 14.93 inches, respectively), the price of water is significantly less than 0.7 cents per gallon (even after rising modestly by 8-10 percent over the past year). San Francisco, which gets almost twice the rainfall of San Diego and close to the average for the state (21 inches a year), has a slightly higher price but still below a penny a gallon. Such low prices hardly send a signal that water is as scarce, or valuable, as the governor says. One of the authors, McKenzie, and his neighbors are even more privileged than Angelinos when it comes to the price of water. His water price in a nice neighborhood adjacent to the University of California, Irvine campus is $1.48 per 100 cubic feet of water (or 780 gallons)—0.2 cents per gallon. Therefore, McKenzie can buy more than 2,000 gallons of water for the price of a gallon of gas. The point is that water remains so embarrassingly cheap in many parts of California that the vast majority of state residents don’t know its price (and have little reason to investigate it). So they continue to water with abandon, take long showers, and let their faucets run freely. The Solution? Pricing, Not Policing

A better solution than water policing? Raise water rates until they hurt (or at least go high enough that Californians notice)—and spur conservation. Economists estimate that in the short run, a 10-percent hike in water rates will cause homeowners to cut consumption by 2 to 4 percent, which means that rates will have to rise by as little as 50 percent to reduce consumption by 20 percent. Substantial water-price increases are working in agricultural areas, where farmers and ranchers have seen a seven-fold increase in the price of water bought by the acre-foot over the last year—from a scant .04 cents a gallon to 0.3 cents a gallon. This means that, last year, farmers could buy more than 10,500 gallons of water for what they would have paid for a single gallon of gas). Still, the price increase has caused the state’s farmers to leave half a million acres unplanted and to send herds of cattle to butchers. Some farmers and ranchers have found selling their water rights more profitable than using them, which means that the available water at the higher prices is being diverted to higher-valued uses than the sellers have. If the higher prices last, conservation will increase. Many farmers can be expected to substitute sprinkling for flooding fields. One can even imagine more farmers becoming “water farmers,” that is, selling their low-priced water to people with higher-valued uses. Both sides would benefit from this exchange. Substantial rate hikes will cause homeowners to think carefully about their plant selections for backyards. Moreover, higher water prices can cause the available water supply in the state to rise in several ways. Water authorities can expand their: searches for additional water supplies at greater distances and greater depths in the case of ground water.

water reclamation efforts.

reliance on desalination projects.

efforts to reduce water losses in their aging and leaky distribution pipes and canals (which now range from 10 to 30 percent). Water customers will be induced to buy more water-efficient, albeit higher-priced, clothes and dishwashing appliances, and they will increase their efforts to reclaim water from their showers and air conditioners. Californians can also be expected to move their purchases from more-expensive products that use a lot of water to less-expensive ones that use less water. Heavy commercial water users can be expected to move to regions of the state and country with greater water resources and lower water prices, leaving behind more water for the remaining Californians. For related ideas, see also “Why Government Doesn’t—and Can’t—Manage Resources Like a Private Business,” by Robert P. Murphy. Library of Economics and Liberty, December 2, 2013. Expansion of the state’s water resources, made economical by the water-price increases, can translate into greater state production and income than otherwise, thus muting the economic damage of the drought. The main effect of water policing and marketing efforts may simply be a drain on community budgets, with no positive effect on water reserves. The Fairness of Price Hikes

A simple economic truth is that water-price hikes can get the job done without the expense—and the inefficiency—of conservation ads and water police—as well as the discord that can arise when neighbors snitch on and shame each other. Also, people differ dramatically in their subjective evaluation of goods and services, and water authorities, no matter how smart they are, literally cannot know these evaluations. Who is to say whose water use is more “fair”—that of the gardener who delights in a green, perhaps small, yard or that of the diner who likes guacamole with chips before a steak dinner and a chocolate dessert? An extra day of lawn sprinkling might require no more than a couple of dozen gallons of water. One avocado used in guacamole requires 220 gallons of water to grow. Each pound of beef requires 5,000 gallons. Each ounce of chocolate sauce spread on ice cream requires 178 gallons of water to produce. But won’t price hikes hurt the poor? A simple solution can counter concerns for the poor: Water authorities can charge progressive water rates, meaning that rates rise with water usage (which San Diego and the Irvine Ranch Water District in Orange County have instituted). Such a progressive water-rate structure can kick in after some water-use level (deemed “minimal” for low-income customers) has been reached. Higher prices will mean that more water will be available for higher-valued uses, which will allow for more state production and income. Hence, pricing will reduce the economic damage from the drought by more than would be the case under policing. Opposition to Water Price Hikes?

Why do many water authorities favor policing over pricing? First, most of them have probably not seriously considered the benefits of higher prices. Also, the economic (and social) benefits from low water prices, which are expected to continue into the future, can become capitalized into the value of properties—especially businesses—that use a lot of water. An increase in the price of water can undercut the properties’ market values. Many people who lose market value in their properties might be expected to oppose price hikes—until they consider how a largely multi-year drought, along with low water prices, has resulted in a drop in water reserves and a concomitant rise in economic damage. That damage can be relieved partially through reliance on higher prices that can increase water supplies for higher-valued uses. This means that with higher prices, property values would be higher than they would be if the available water were allocated by water police. Concluding Comment

In short, Californians, the governor included, need to move toward allowing a greater swath of the state’s water markets to operate the way Snickers and Mercedes (and avocado, lemon, grape, and carrot) markets operate, with prices rising and falling with supply and demand. In other words, when rainfall in the winter months falls short of “normal,” water prices should be raised to induce conservation to ensure adequate, worst-case contingency reserves. When rainfall in the state returns to normal levels (or above), water prices can be allowed to drift downward. The simple fact is that water authorities don’t know how their customers can best use water. They don’t know, and can’t know, what constitutes “higher-valued uses” for all the customers under their control. Hence, any set of water-use restrictions they devise will restrict available water and will deny water use for purposes that many customers value highly. Thus, water restrictions will waste water, by deploying it away from its highest-valued uses. Over the long haul, the water restrictions will not encourage needed repairs in water systems or the search for additional water sources that price hikes would. Hence, water restrictions will cause the amount of water available in the state to be less than otherwise. They also will impair the growth of Californians’ incomes as communities seek to raise taxes to pay for the water police and as they get less value out of their drought-limited and mispriced water resources.