Water Economics 1 – Price Shapes Demand
Posted May 4, 2010
Environmentalists have long decried subsidies for water used in the agricultural sector. In the water-short West, agriculture uses 80 percent or more of the developed water supply. Subsidizing agricultural water use exacerbates shortages for other farmers, increases environmental conflicts and reduces the water available for urban areas. But the impact of water prices isn’t limited to the farm. It plays a role in our cities as well. Circle of Blue just released this interesting survey of water rates in 30 cities across the nation. The importance of price is quite clear.
A few numbers jump out in this summary of findings. For example, Fresno has the lowest average monthly water bill and the highest per capita water use in the entire survey. Continuing the trend, Salt Lake City has the second lowest average bill and the second highest water use. On the other end of the spectrum, Seattle and Santa Fe have the highest water rates and, not surprisingly, are among the cities with the lowest use of water.
Anyone who has taken Economics 1 can tell you that price influences demand. This lesson, however, is often lost in the water policy debate. As my colleague Ed Osann wrote recently, water in California is not getting cheaper. It’s also not getting more plentiful.
It’s not hard to do the math here. We’ve hit “peak water” in every major California river system. Climate change is likely to reduce our existing supplies. Water rates are already increasing in California. Those prices are certain to face larger increases in the future. There are a couple of obvious lessons here.
Cities like Fresno, which is among the thirstiest cities in the West, should do more to save water and help their agricultural neighbors. Fortunately, state law already requires Fresno and Sacramento, their thirsty neighbor to the North, to install water meters and bill volumetrically. This requirement will send a price signal to customers for the first time – undoubtedly leading to water savings. These cities should plan to install meters as soon as possible.
For Southern Californians, the lesson is a little different. In the coming few years, Southern Californians will be faced with decisions about how to invest billions, and possibly tens of billions, in water system improvements ranging from helping to pay for a Delta Plan to investments in additional supplies. On the latter front, water agencies face a vast array of choices, including desalination, water recycling, agricultural transfers, capturing urban stormwater, urban conservation and groundwater management. Given the dramatic impact that these investments will have on water rates, economics will likely play a major role in this discussion.
I predict that we are entering a period in the California water debate where the economics of water will play an increasingly prominent role. More and more, California water agencies will be asking themselves what their options are, what these options cost, and what benefits they would deliver. Most of the time, the right environmental answer also represents the sound business decision. Realistic water pricing is a good first step.
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