California’s Water Shortage

by on October 16, 2014 at 7:30 am in Economics, Law | Permalink

In the 1970s the US faced a serious shock to the supply of oil but the shortage of oil was caused by price controls. Today, California is facing a serious water drought but the shortage of water is caused by price controls, subsidies and the lack of water markets. In an excellent column, The Risks of Cheap Water, Eduardo Porter writes:

Water is far too cheap across most American cities and towns. But what’s worse is the way the United States quenches the thirst of farmers, who account for 80 percent of the nation’s water consumption and for whom water costs virtually nothing….

Farmers in California’s Imperial Irrigation District pay $20 per acre-foot, less than a tenth of what it can cost in San Diego….This kind of arrangement helps explain why about half the 60 million acres of irrigated land in the United States use flood irrigation, just flooding the fields with water, which is about as wasteful a method as there is.

Tyler and I discuss water subsidies in Modern Principles:

Farmers use the subsidized water to transform desert into prime agricultural
land. But turning a California desert into cropland makes about as much sense
as building greenhouses in Alaska! America already has plenty of land on which
cotton can be grown cheaply. Spending billions of dollars to dam rivers and
transport water hundreds of miles to grow a crop that can be grown more cheaply
in Georgia is a waste of resources, a deadweight loss. The water used to grow California cotton, for example, has much higher value producing silicon chips in
San Jose or as drinking water in Los Angeles than it does as irrigation water.

The waste of subsidized water is compounded by over 100 years of rent-seeking and a resulting legal morass that makes trading water extremely difficult (see Aquanomics for a good analysis). A water trading system is slowly taking form in the American West but the political transaction costs are immense. Australia, however, faced similar difficulties but has managed to develop a good water trading system and Chile has long had a robust market in water. Subsidies to farmers are politically sustainable when everyone has as much water as they want but when faced with continued shortages and an ever-intrusive water Stasi consumers and industry may eventually demand a more rational, less wasteful system based on incentives, markets and prices.

1 Fred October 16, 2014 at 7:55 am

Cheap water acts as a yet another meat-industry subsidy. It’s bad for the planet and public health, so I’m hopeful things change on this front.

2 dearieme October 16, 2014 at 11:07 am

Some people have a strange inability to understand why water should be charged for at all. The notion of charging a market price would cause them deep emotional scarring. Have a care!

3 The Other Jim October 16, 2014 at 8:09 am

>Aquanomics

This guy gets it. They biggest key to academic publishing success is a catchy title.

4 RR October 16, 2014 at 10:19 am

Quite right !

A couple of others I had come acros:

An article in History of Science : ” Science: Does its present past have a future?”

A book in History of Technology : ” From know-how to nowhere : the development of American Technolgy.”

5 Benny Lava October 16, 2014 at 8:10 am

Yup the shortage of water isn’t caused by historic drought. Nope. Just ask the hydrologist – I mean economist. They think they know everything so therefore they must know everything.

6 Cliff October 16, 2014 at 9:11 am

You don’t think price controls on water are particularly pernicious in a time of drought?

7 mulp October 16, 2014 at 5:42 pm

You must be a socialist who believes all resources are owned by the state and private ownership must not be tolerated.

If I own the water, my using it for free instead of being forced to pay the government is not price controls but ownership.

8 tomhynes October 16, 2014 at 11:03 am

Shortages can only be caused by government interfering in the market. Otherwise, it is just a price rise.

9 prior_approval October 16, 2014 at 1:11 pm

Assuming you are sincere, this graphic demonstrates why shortages can be due to things beyond any government’s – or market’s – control. http://www1.ncdc.noaa.gov/pub/data/cmb/sotc/drought/2014/09/noaa-hprcc-pcp-pct-us-36m-0930.png

10 JWatts October 16, 2014 at 2:38 pm

I agree with tomhynes. Given an unfettered market, any reduction in supply of water is, over the medium term going to result in a price rise, resulting in the lowest value buyers dropping out of the bidding and the supply and demand balancing out.

If the CA government just sold the water property rights to lower level owners, the likely affect would be marginal farmers selling their water rights and getting out of the low value crop production business. Growing cotton in an arid area is a classic case of a dysfunctional market.

11 mulp October 16, 2014 at 5:48 pm

So, if government sold your car and house “to lower level owners”, you would get out of your car and house and they would be better utilized?

After all, your failure to fill your house with 15 immigrant farm workers and using your car to get them to and from farm work is “a classic case of a dysfunctional market.”

The farmer “growing cotton in an arid area” is merely seeking to maximize returns on his property, his water rights.

What are you, some sort of leftist socialist who rejects property rights?

12 JWatts October 16, 2014 at 7:19 pm

Your example makes absolutely no sense. The analogy would be if Government sold Section 8 housing to the tenants. The tenants would be free to either utilize the house or sale it and move to a location of their choosing.

The current water rights are held by the government and allocated out politically. Once they were in private hands, the owners of water rights, particularly the low value per water utilization crop farmers would be able to choose to either keep & use their allocation or sale it. During a period of water supply shortage marginal farmers would sale, thus increasing the supply of water to those that could more effectively use it.

13 bartman October 16, 2014 at 3:36 pm

So, you clearly don’t have the first notion of what a “shortage” is.

Hint: it is not the same thing as an upward shift of the supply curve, which is what you are describing.

14 Agra Brum October 16, 2014 at 2:57 pm

That ignores the fact that the water in California is only there because of the government – they built the hundreds of dams and the vast aqueducts and pumping stations to move the water around (the water system is the largest user of electricity in California; just the state water project alone uses 3% of all the electricity in California, and that does include LADWP or the other local water districts).
“Shortages” are about the depletion of the reservoirs; when they run dry, there will be much less to go around, and someone (the farmers) will finally lose out.

15 Tom Sullivan October 16, 2014 at 10:53 pm

There is a water “shortage” only because government is wasting water by selling it at absurdly low, subsidized prices and in a non-market restricted to farmers only.

If the government were not supplying the water, someone else would, and they’d be erasing shortages everywhere. The trouble is, the government has a monopoly on supply by law, and is charging only 1 cent per 165 gallons to farmers. No one else can offer a better price, in order to sell it elsewhere, where it is more highly valued. The government subsidized production is a huge waste of resources (water) – a direct cause of shortage, and huge waste of taxpayer money.

Here in the real world, I pay about 300 times as much for water (in my suburb).

16 brad October 16, 2014 at 5:01 pm

There’s plenty of water for the people living in California. There just isn’t plenty of water for the idiotic project of turning the desert into a rain-forest.

17 mulp October 16, 2014 at 5:51 pm

But you are speaking as a leftist socialist who does not believe in property rights.

Farmers own their water. Even if it does not snow or rain.

Every conservatives knows property rights are granted by god and only radical leftist try to take away god given property rights.

18 Benny Lava October 16, 2014 at 6:39 pm

Don’t you like eating food? They grow a hell of a lot more than cotton in California. Maybe Alex can eat his own petard?

19 brad October 17, 2014 at 4:19 pm

That’ll less of a problem if we eliminate protectionist trade barriers. There are places in the world where it does rain, you know.

I’m confident that food will be produced even in the absence of massive governmental distortions.

20 prior_approval October 16, 2014 at 8:16 am

‘In the 1970s the US faced a serious shock to the supply of oil but the shortage of oil was caused by price controls.’

Well, that is one way to look at it. A more accurate way would be based on facts – ‘In response to the U.S. aid to Israel, on October 16, 1973, OPEC announced a decision to raise the posted price of oil by 70%, to $5.11 a barrel.’ One should note that this web site normally completely favors producing entities charging whatever the market will bear.

Of course, the next day, OPEC decided to do this – ‘The following day, oil ministers agreed to the embargo, a cut in production by five percent from September’s output, and to continue to cut production over time in five percent increments until their economic and political objectives were met.’

And as one would expect, the market responded to such events in typical fashion – ‘Since short-term oil demand is inelastic, demand falls little when the price is raised. Thus, oil prices had to be raised dramatically to reduce demand to the new, lower level of supply. Anticipating this, the market price for oil immediately rose substantially, from $3 per barrel to $12 per barrel.’ http://en.wikipedia.org/wiki/1973_oil_crisis

Not a single price control in sight – that all came later, after the OPEC price rise, the cuts in OPEC supply, and the response of the marketplace.

And this little data point might be useful for the second event – do notice the 0. http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTTIM_NUS-NIR_2&f=A But I guess, technically, that 0 was from 1981, while the 9 thousand barrels a day was in 1980. (In 1978, the figure was 555 thousand barrels a day.)

Figures from before 1973 concerning imports are not exactly accessible – mainly because the OPEC boycott in 1973 is what fostered the creation of the international and federal reporting infrastructure that shows what happened after the U.S. approved Iranian oil supplier in chief in Iran was replaced by a religious fanatic from the middle ages in 1979.

‘Today, California is facing a serious water drought but the shortage of water is caused by price controls, subsidies and the lack of water markets.’

Some people, noting the lack of actual rainfall and snowpack, might prefer to think that the drought is actually caused by the weather. But then, those sort of people are extremely unlikely to find a place in the Mercatus Center or Independent Institute.

But for those interested in a graphic – http://www1.ncdc.noaa.gov/pub/data/cmb/sotc/drought/2014/09/noaa-hprcc-pcp-pct-us-36m-0930.png showing just how much of a role the market has played concerning current water supplies for California. (the current September overview of drought in the U.S. can be read here – http://www.ncdc.noaa.gov/sotc/drought/ )

Markets may be one way humans allocate resources such as fresh water – the amount of fresh water that actually exists is independent of the market, regardless. A fact that the linked graphic makes plain.

21 Mark Thompson October 16, 2014 at 8:56 am

All valid points and a good refresher on the happenings in the 70s.

The _point_ of the article though, is that price is a signaling mechanism to allocate efficient use of the _available_ water, regardless of the causes of the changes in availability.

It stands to reason that there’s a limit to what a region can support in terms of water usage, especially if one consider that the weather is, in fact, fickle.

Pricing, while not perfect, can in fact mitigate waste. I have long favored _higher_ taxes on gasoline, for example, with the idea that it would lower consumption of another _finite_ resource.

22 JWatts October 16, 2014 at 10:05 am

I don’t think p_a generally cares about the point of any given article. He just uses any excuse to grind his ax.

23 CC October 16, 2014 at 11:08 am

+1. Does p_a actually think that Alex was proposing rational pricing as a mechanism for changing the weather? I’ve noticed generally that many people on this site are so desperate to disagree with Alex in particular, that they’ll argue with a post that says the sky is blue and make total fools out of themselves in the process.

24 J October 16, 2014 at 11:21 am

Anti-Canadian bigotry.

25 prior_approval October 16, 2014 at 12:20 pm

No, I think Prof. Tabarrok believes this – ‘In the 1970s the US faced a serious shock to the supply of oil but the shortage of oil was caused by price controls.’

Which, in light of the fact that OPEC actually cut its exports to various countries, is simply incorrect – ‘This control of a vital commodity became known as the “oil weapon”, which came in the form of an embargo and cutbacks in oil production from the Arab states to select industrial governments of the world to pressure Israel during the fourth Arab-Israeli War in October 1973. These target industrial governments included the United States, Great Britain, Canada, Japan, and the Netherlands. In retrospect, the purpose of the embargo, as perceived by these target governments, was to sway their foreign policies concerning Israel towards a more pro-Arab position by threatening to cut off exports of Arab oil, and that in altering their policies the Arab states would respond by again allowing their purchase of more oil.[24] The Arab states selected their target governments to emplace their embargo, mostly affecting European Common Market countries and Japan with an eventual 25% oil cut in production.’ http://en.wikipedia.org/wiki/1973_oil_crisis#Arab_oil_embargo_in_response_to_war

The 1979 oil shock had nothing to do with price controls, but it did involve the complete cutting of Iranian oil imports into the U.S., along with disruption of oil supplies from Iraq after the start of the Iran-Iraq war in 1980 ( http://en.wikipedia.org/wiki/Iran–Iraq_War )

The shortage of oil in both cases was real – the price controls in the early 70s time frame were a response to OPEC’s actions in cutting exports, not the cause.

26 prior_approval October 16, 2014 at 12:56 pm

‘The _point_ of the article’

I merely cited Prof. Tabarrok’s own words – ‘Today, California is facing a serious water drought but the shortage of water is caused by price controls, subsidies and the lack of water markets.’

The shortage of water in California can be easily explained by looking at this simple graphic – http://www1.ncdc.noaa.gov/pub/data/cmb/sotc/drought/2014/09/noaa-hprcc-pcp-pct-us-36m-0930.png

The allocation of water during a drought may well be an interesting subject, but one that requires, a priori, a drought. And droughts, generally, are referred to as a shortage of water, regardless of how the remaining water is allocated. The graphic succintly demonstrates why there is a shortage of water in California, irrespective of how that shortfage in water is allocated or distributed.

27 JWatts October 16, 2014 at 2:40 pm

So you were being pedantic. Ok.

28 prior_approval October 16, 2014 at 4:21 pm

Factual, pedantic – whichever you prefer.

29 mulp October 16, 2014 at 5:58 pm

“The _point_ of the article though, is that price is a signaling mechanism to allocate efficient use of the _available_ water, regardless of the causes of the changes in availability.”

Ok, but that applies to all the Monet’s and Picasso? Should the government cut them into pieces and sell the pieces to the highest bidders. You don’t seem to believe in private property rights for water, so how about paintings?

Or your house and car? Should the government sell yours off to better use them?

30 Cliff October 16, 2014 at 9:13 am

“The price went up” does not mean “there was a shortage”

31 mofo. October 16, 2014 at 11:22 am

yea, you could just read further in the wikipedia article you linked to where price controls and thier effects are discussed:

https://en.wikipedia.org/wiki/1973_oil_crisis#Price_controls_and_rationing

Government price controls further exacerbated the crisis in the United States,[33] which limited the price of “old oil” (that already discovered) while allowing newly discovered oil to be sold at a higher price, resulting in a withdrawal of old oil from the market and the creation of artificial scarcity. The rule also discouraged alternative energies or more efficient fuels or technologies from being developed.[33] The rule had been intended to promote oil exploration.[36] This scarcity was dealt with by rationing of gasoline (which occurred in many countries), with motorists facing long lines at gas stations beginning in summer 1972 and increasing by summer 1973.[33]

32 bjssp October 16, 2014 at 11:49 am

Since when do “caused” and “exacerbated” mean the same thing?

33 Cooper October 16, 2014 at 1:09 pm

The 70s had horrible energy policy across the political spectrum.

* Carter pushed us off natural gas and onto coal, resulting in billions of tons of unnecessary carbon emissions.
* Greens pushed us away from nuclear power which any rational analysis will conclude was a horrible decision.
* Nationalists pushed us to ban the export of petroleum which accomplished nothing useful and needlessly drove up prices through wasted transport costs.
* Nixon’s Odd/Even rationing scheme was a disaster and if anything just let to more wasted gas as people sat in gas lines.
* The old oil/new oil thing was another result of brainless policy.

The only helpful policies to come out of that era were the C.A.F.E. standards and increased government spending on basic research into non-fossil energy sources.

34 Cooper October 16, 2014 at 1:09 pm

Those were supposed to be bullet points, not one giant jumble of text. Sorry!

35 Benny Lava October 16, 2014 at 6:38 pm

Carter removed price controls but it didn’t stop gas lines in the early 80s. By the way why don’t you give Carter credit for deregulation.

36 Cooper October 16, 2014 at 8:01 pm

Carter was a mixed bag on energy deregulation. For example, he pushed through the Powerplant and Industrial Fuel Use Act of 1978 which banned the use of natural gas in new electric power stations and industrial boilers.

http://www.eoearth.org/view/article/155329/

He did do a great job of deregulating the airline/trucking industries through.

37 brickbats and adiabats October 16, 2014 at 8:57 am

Half-right. Points for partial credit.

The oil supply crisis was not caused by price controls and quotas and such, the proximate cause was a sudden embargo and drop in supply in 1973 due to US support for Israel. You can make a convincing case that price controls _prolonged_ the oil crisis, because US production was down for years afterwards as the effective margin on refining a barrel of oil dipped well below what made refineries able to purchase production from new fields, and you can similarly make a convincing case that rationing also prolonged the oil crisis because it not only created a panic mentality whereby people increased the levels they kept in their tanks (increasing inventories in a time of shortage) and also because rationing by queueing not only wasted colossal amounts of man-hours but also fuel.

Similarly, California is in a state of severe drought due to exceptionally poor precipitation. This is the first time in my memory (and I was born and raised in California) that my parents were praying for an El Nino. The drought is many times worse than it is because California’s water infrastructure and regulation are Byzantine messes created to entrench the rights of stakeholders at a time when California had half the population and farmers were an incredibly powerful political bloc. We saw this drought coming all through last year. But there are no mechanisms to trade water rights, no market mechanisms now or in the past to discourage farmers from planting rice, cotton, or pistachios, no futures contracts to allow municipal or industrial consumers to bid for supplies, and overall the pain is falling not on the most efficient or highest-value users of water, but on the politically privileged. So it’s making it worse.

38 Agra Brum October 16, 2014 at 3:06 pm

Ah, yes. This is a good response. There are two critical factors, the supply, and the allocation. Obviously, the drought is related to weather, and the very small snowpack from the prior winter (and excaerbated by several years of low snow pack, dropping the reservoirs). So the supply is very low.
But the allocation is very antiquated, with old farms from 1905 growing wastefully taking priority over others. Rice may have made sense in past times of abundance, and in delta marshland, but there needs to be market adjustment.

39 Art Deco October 16, 2014 at 10:04 am

Sounds like a great idea. The trouble is, ordinary people are regrettably easy meat for demagogues of all stripes when they’ve been accustomed to socialized costs of daily living.

We might attempt a number of sensible policy measures e.g. financing the maintenance of limited-access highways strictly through tolls, congestion pricing on selected highways, financing public road construction strictly through fuel excises (about $3.25 a gallon would cover it), and pricing water to encourage conservation and limit aggregate consumption to a global budget. We might also recompose insurance law to render the bog standard medical plan one which covers expenses over high deductibles and amend medical guild law to require providers to publish their prices in a standard format.

This was not George W. Bush’s finest hour

http://www.livingroomcandidate.org/commercials/2004

(click the fifth thumbnail in the “Republican” row).

That’s what you get when you propose people pay full freight.

40 Anon October 16, 2014 at 10:13 am

+1.

It may have been Karl Rove’s finest hour. (The end justifies the means.) No where is it said that all men are created rational.

41 JWatts October 16, 2014 at 10:19 am

“That’s what you get when you propose people pay full freight.”

I see your point, but the US gas tax is a bad example of this. Substantial amounts of Federal gas taxes get siphoned off for other purposes (such as bike lanes and subsidizing mass transit), so many people feel that people riding bikes and trains are the ones not paying their full freight. Maybe the current Federal gas tax isn’t enough to cover Federal road maintenance, but it certainly doesn’t help when substantial amounts of it don’t actually go to road maintenance.

And in any case, the current tax is $0.19 per gallon for gasoline. John Kerry’s proposal to raise it by $0.50 was never intended to cover the costs for additional road maintenance. It was designed to act more as a Sin tax to discourage driving.

Do we really want to force the poor in this country off of the roads to free them up for the middle class, by imposing an artificially high cost on driving?

42 chuck martel October 16, 2014 at 11:16 am

Centuries from now anthropologists will be hashing over the remarkable fixation 20th & 21st century Americans had on automobiles and instant transportation. They’ll be amazed at the percentage of their income Americans spent on cars, garages, motor fuel, etc. They’ll be incredulous at the hours spent in traffic going to and fro to work to pay for the cars they drove to and fro to work. They’ll be astonished at the millions of acres of fertile soil hauled away or covered up with asphalt and concrete to create pathways for those cars. They won’t believe that a society could be structured around a form of transportation to the extent that businesses like drive-in restaurants, mortuary viewing windows, bank tellers, drive-through liquor stores and movie theaters would all be accessible from the front seat of a Camry. They’ll comment on the fact that the state came to register and regulate its citizens on the basis of a card authenticating the right to operate a motor vehicle. They’ll observe that day-to-day law enforcement took place almost exclusively from the interior of a computer-equipped car and that the overwhelming majority of detected and punished crimes were related to transgressions of motor vehicle statutes. They’ll think that some form of mass insanity infected these people.

43 Brenton October 16, 2014 at 11:30 am

One of the numerous results of centuries long dysgenic breeding, I imagine. As anyone who tries to look can see the stats that show public transportation to be highly cost ineffective and a much greater waste of peoples time than “sitting in traffic”.

44 John Mansfield October 16, 2014 at 11:35 am

Then they’ll look at what went into maintaining horses in the preceding centuries, and they’ll calm down.

45 prior_approval October 16, 2014 at 12:59 pm

Probably not – notice that comment concerned personal automobiles, and not farming nor transport of goods nor warfare, all areas where horses played a much greater role in society than for personal transportation..

46 mofo. October 16, 2014 at 11:26 am

If that increase in gas tax came with a decrease of some other, worse form of taxation, say income tax and SS on the poor, then i say yes, lets increase the tax on gas. Im guessing that wasnt part of the proposals you are talking about though.

47 Art Deco October 16, 2014 at 11:56 am

Do we really want to force the poor in this country off of the roads to free them up for the middle class, by imposing an artificially high cost on driving?

The costs would not be ‘artificially high’. The cost of road maintenance would fall on people in their capacity as motorists rather than in their capacity as income earners or consumers or property holders (and recall that property taxes are passed on to renters). Which is to say that the costs would be more precisely rendered. Nor would it ‘force’ ‘the poor’ ‘off the roads’. The most thoroughly impecunious do not own cars to begin with; the remainder would substitute other forms of locomotion for driving or travel less to account for the change in prices. Less driving does not mean no driving.

As we speak, gasoline purchases tend to amount to roughly 15% of the cost of owning a motor vehicle for the typical driver; you have amortization of the purchase price, repairs, insurance, and registration fees for which to account. Where I grew up, state, county, and municipal authorities spend somewhat north of $600 per capita on road maintenance. Shuffling around that cost would be injurious to people whose expenditure patterns make intensive use of motor fuels. The thing is, any change in the tax or subsidy regime is going to gore someone’s ox. Arguments like yours are arguments for rendering any extant rent or patronage perpetual.

48 Jay October 16, 2014 at 1:29 pm

Yes or no, increasing the gas tax will cause less poor people to be on the roads than in the absence of such a tax? The answer is plainly yes so his statement is true.

Like another poster said, Kerry’s proposal did not come with a drop in some other tax, only an increase. So presumable this would be used for increased spending, maybe some for roads and infrastructure but most of it probably not. The idea that some taxes are used for specific purposes and not lumped into a giant messy ball and therefore a tax is justified because the spending is just plain false.

49 Art Deco October 16, 2014 at 3:34 pm

The answer is plainly yes so his statement is true.

No it is not, because he did not say there would be fewer vehicle-miles traveled. He said there would be no vehicle miles traveled.

Again, the complaint in the advertisement is that the tax would induce higher retail prices for gasoline. That it would. The complaint was not contingent on the use to which the tax was to be put.

50 JWatts October 16, 2014 at 3:44 pm

“He said there would be no vehicle miles traveled.”

No, I didn’t say that.

When I used the phrase “forcing the poor off the road” I wasn’t implying that everyone that meets some arbitrary definition of poor would immediately stop driving the next time they went to buy gas. I think any reasonable reading of my post would have been interpreted as a reduction in the amount of driving for those with lower income.

51 Art Deco October 16, 2014 at 3:46 pm

I think any reasonable reading of my post would have been interpreted as a reduction in the amount of driving for those with lower income.

No, any reasonable reading would be that you meant to say precisely what you did say, which was ‘force the poor off the roads’.

52 JWatts October 16, 2014 at 4:04 pm

I disagree, but you are certainly entitled to your own opinion.

53 JWatts October 16, 2014 at 3:34 pm

“The costs would not be ‘artificially high’.”

If the cost is higher than what is needed to fund road construction and maintenance, then the cost is ‘artificially high’. The specified proposal would have been well over what was needed for just the roads.

54 Art Deco October 16, 2014 at 3:44 pm

Which specified proposal? Given the expenditure levels, gasoline consumption levels, and elasticities of demand which prevail in urban areas in Upstate New York, $3.25 per gallon would be in the ball park.

55 JWatts October 16, 2014 at 3:49 pm

“Which specified proposal?”

The specified proposal you linked to:
http://www.livingroomcandidate.org/commercials/2004 (click the fifth thumbnail in the “Republican” row).

“”Some people have wacky ideas, like taxing gasoline more — so people will drive less. That’s John Kerry. He supported a 50-cent gas tax,” an announcer says in the commercial, which is set to air Wednesday on national cable networks and in 18 states.

“If Kerry’s gas tax increase were law — the average family would pay $657 more a year. “

56 Phil October 17, 2014 at 11:59 am

JWatts – check your assumptions on the statement, “substantial amounts of federal gas taxes get siphoned off for other purposes.”

bike lanes hardly register on the amount of spending. The gas tax does not come anywhere close to paying for all the road infrastructure built. A significant portion (15% if memory serves me right) goes to building new mass transit to keep congestion levels down. (Amtrak’s budget process is separate from the gas tax)
The road maintenance is not covered by the federal gas tax. This comes out of local governments for the most part, separate from the gas tax.
Roads and car infrastructure are heavily subsidized already. http://usa.streetsblog.org/2013/01/23/drivers-cover-just-51-percent-of-u-s-road-spending/

57 mpowell October 16, 2014 at 11:56 am

The vast majorities already pay more than full freight for water. It’s agriculture that is subsidized. So it’s a much different dynamic here. This is an interest group/lobbying dynamic where the agricultural business needs their subsidy to stay in business and the political elites are totally captured to the point where there is a massive public information campaign on how everyone needs to save water (even though they pay 10x more than agriculture and consume a small fraction of total water).

58 Art Deco October 16, 2014 at 12:01 pm

I’m from New York. Agriculture is rain-watered in my neck of the woods.

If the growers pay more for water, the following will happend

1. Some land will be taken out of production; and
2. Some crops will be substituted for other crops.
3. The price of some crops will increase for the distributor, retail tradesman, and consumer.

Yes, some people will be driven out of business. That happens in business. It’s not as if the number of people making a living in agriculture has been increasing in the last nine decades.

59 Jay October 16, 2014 at 1:32 pm

Your #3 is only true in the short-term. As price increases a farmer in Georgia may switch his crop to produce more of the now “overpriced” good or new land developed. That is Alex’s point.

60 mpowell October 16, 2014 at 4:21 pm

All that is fine, but the original post was about water in CA! That’s a different beast.

61 Just Another MR Commentor October 16, 2014 at 10:12 am

When you restrict immigration is it any surprise that industries, such as water manufacturing have difficulty finding enough workers?

62 Clover October 16, 2014 at 1:00 pm

Good one.

63 Steve Sailer October 16, 2014 at 11:05 pm

Indeed.

64 Scott H. October 16, 2014 at 10:57 am

What do you know about building greenhouses in Alaska?

65 Spencer October 16, 2014 at 11:01 am

Yes.t is a surprise.

On the other hand it would not be a surprise if water manufacturing raised labor compensation and they still had difficulty finding enough workers.

I find it amazing that economics teachers spend a lot of time in their intro class trying to implant in students minds that if you want more of something just raise prices. But they than turn around and try to teach the same students that you get more labor by cutting prices. Next, they wonder why the students are having trouble getting it.

66 EPM October 16, 2014 at 11:23 am

Hi Tabarrok and Cowen!

I’m a long-time reader of your website and I appreciate it very much, even though I’ve never left a comment before, but water market took my attention since I live in São Paulo, Brazil, and we’re facing the same issue here: a severe water shortage and an autist government that keeps sometimes blaming people or the weather, sometimes saying that everything is fine, as if there were no such a think like scarcity.

My point is that I’m writting my master thesis on applied mathematics and financial markets (very technical), but with an introduction justifying the study of financial markets and the use o financial instruments, somehow answering the “financerization theory”. Now, I’m looking for academic responses to “financerization theory”, but I could not find anything really good. Any suggestion?

Thank you!

67 Alex Tabarrok October 16, 2014 at 12:13 pm

Take a look at Edward Conard’s book

http://www.amazon.com/Unintended-Consequences-Everything-Youve-Economy/dp/1591845505/ref=sr_1_1?ie=UTF8&qid=1413475727&sr=8-1&keywords=edward+conard

and the work of Hsieh and Klenow which suggests the large costs of misallocation and thus the potentially large role that financial markets may play in improving allocation

http://klenow.com/MMTFP.pdf

68 EPM October 16, 2014 at 12:34 pm

Thank you very much!

69 gary jones October 16, 2014 at 11:45 am

San Diego gets its water from the Colorado river hundreds of miles away. It would otherwise have very little water since the local mountains and rivers are inadequate even in the best of times. It makes much more sense for them to use the ocean at their doorstep as their source of water. This is not an allocation problem, it is a technological problem.

The article is juvenile. The problem isn’t economics as a discipline, it is ignorance of the subject to which economic methods are applied. Garbage in, garbage out.

70 Agra Brum October 16, 2014 at 3:10 pm

Does it “make sense” if that water from the ocean costs 2-3 times as much?
It is a technological problem in that osmosis is expensive and (to repeat myself) energy intensive. In that sense, super-cheap energy would fix this problem (like so many others). And San Diego has hedged with the construction of a desal plant. But that water will be much more expensive than Colorado River water…

71 gary jones October 16, 2014 at 4:16 pm

Yes, it makes sense. The problems would not be solved by taking water from others – the allocation hack – it would just make problems for others. Worse, it’s only temporary relief even for the takers since demand will inexorably rise over time.

Most of the world’s population lives near oceans so this is a world wide issue, and it is being addressed by ever better methods to separate the compounds in sea water and market them. Water is not the only material of value in sea water so industries to “mine” such water are developing too.

Energy need will grow as well, for this and many other necessary purposes. Hunkering down to “save” energy will not succeed. Efficiency will not reduce energy need, it will increase it as the efficient users demand more total energy for increased production.

None of these reduce, reuse, conserve, control and allocate hacks have any chance at all of improving the situation. Markets are a more reasonable and effective means of dynamic allocation of desirable materials and services than regulation, but the key word is “dynamic”. It’s constantly changing and adapting. Assuming that problems are “solved” by such dynamic distribution blinks the reality that demand will continue to increase and that such “solutions” are ephemeral.

Increase the supply. That’s the sensible approach. This is happening already as we might expect since there is demand. Industries are developing for increased production of both energy and potable water. Hopefully, political and economic rentiers will not hamper development.

72 Art Deco October 16, 2014 at 5:50 pm

None of these reduce, reuse, conserve, control and allocate hacks have any chance at all of improving the situation.

Oh yes they do. People’s water usage has some biological baselines; that aside, water consumption is not fixed (nor is it necessarily all that inelastic). People can substitute domestic practices, substitute production process, and substitute product mixes in response to price signals. Your solution only works for San Diego if auctions in which the San Diego water authorities participate generate higher prices than the production costs of desalination plants.

73 Brian October 16, 2014 at 12:09 pm

Price controls in action:

Price ceilings in water. Supply of water decreases (drought). Shortage increase. Crisis ensues. Public outcry to reduce demand to eliminate shortage, and very little call for a lifting of the controls.

Raise the minimum wage! Supply of labor already had increased, and unemployment is already high. Labor surplus and unemployment increase. Crisis ensues. Public uses the outrage to castigate libertarian republicans.

Marginal steps….in the wrong direction.

74 Brandon October 16, 2014 at 5:32 pm

Perhaps because raising prices doesn’t actually solve the underlying demand problem except in the simplest mathematical economic sense. In economic terms, if I can’t pay for an inflated cost of water, I don’t have ‘demand’ for it, but in the real world, I still need water to drink and grow my crops.

Higher prices means demand drops because less things are going to get produced (grown). Making production more efficient means we can continue to grow to meet those demands and alleviate the water shortage.

75 Andrew_FL October 16, 2014 at 9:36 pm

Yeah because it’s not like there’s any demand for water for anything other things where one still needs it even if one can’t afford it.

The price rise causes more efficient productive use of water. Because people don’t respond to more expensive water by drinking less or watering their crops less. They respond by not using water for non-vital things, first, and by finding ways to do the vital things with less of the more expensive water.

You want to have it both ways, with water still cheap enough to waste on frivolity but more efficient use of it somehow promoted. It doesn’t work that way.

76 Al October 16, 2014 at 12:13 pm

The cost for the California bullet train is currently estimated to be about $68 billion. The amount of money which will be spent on water “infrastructure, supply and quality” if California’s Proposition 1 passes next month will be about $7 billion.

I wonder if California’s spending priorities are misplaced. Maybe we should be building $68 billion worth of water desalination plants instead.

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78 prior_approval October 16, 2014 at 1:13 pm

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79 Clover October 16, 2014 at 12:56 pm

Seems like the underlying cause of this “water shortage” is the massive increase in population in California. This is just one more example of the ‘indirect’ costs of immigration. The need to expand California’s water capacity is caused almost entirely by the increase in population due to mass immigration, but who is going to pay for it?

80 Al October 16, 2014 at 1:38 pm

Inasmuch as we have less water to use, we will use _more_ of _other_ resources to compensate.

If I replace my lawn with a drought tolerant landscape consisting of gravel and a sparse array of cactus plants, I have to pay someone to haul a large quantity of gravel from somewhere far away from my home. That requires truck fuel for transportation and additional fuel to quarry and process the aggregate. I also have to buy some cactus plants and hire someone to convert my existing lawn sprinkler system into some kind of low-volume drip irrigation system for the cactus. I also have to buy drip irrigation tubing and water emitters.

If I replace my old toilet with a newer, 1.6 gallon per flush model, I have to spend at least and additional $100 on the new crapper. And let’s say my plumber charges me $79 to install it. If water costs 1 cent per gallon, and I save, say, 4 gallons per flush because my old toilet was a real hog, that $179 is the same as the water cost differential for about 4500 flushes using the old toilet.

If water had not become scarce in the first place, I could have instead invested that money in a company building something innovative and perhaps even exportable. But no, that money has been sunk irretrievably into unproductive home modifications. And the new toilet has to be cleaned more often than the old one: those low water flushes don’t quite clean out the bowl. Good thing I can hire a low wage immigrant housekeeper to scrub the toilet while I watch HBO and Netflix over broadband internet. See? It all works out.

81 Art Deco October 16, 2014 at 3:37 pm

Water is a superior good. You’d have a higher propensity to consume even without population growth.

82 Craig October 16, 2014 at 2:38 pm

I think growing cotton and rice in the desert is a swell idea.

83 Art Deco October 16, 2014 at 3:38 pm

Can you make it pay with correctly priced irrigation water? If you can, it’s a satisfactory idea.

84 prior_approval October 16, 2014 at 4:28 pm

Then California is not the place for your rice growing dreams – river delta/floodplain are where the rice is grown.

85 gary jones October 16, 2014 at 5:13 pm

http://en.wikipedia.org/wiki/Sacramento%E2%80%93San_Joaquin_River_Delta

“Geologically, the Delta has existed for about 10,000 years, since the end of the last Ice Age. In its natural state, the Delta was a large freshwater marsh, consisting of many shallow channels and sloughs surrounding low islands of peat and tule.”

It helps to have some knowledge of the subject.

86 Michael Cain October 16, 2014 at 7:30 pm

I’m surprised that there are this many comments and no one has remarked on: (a) the largest individual land owner in any of the US states from the Rockies to the Pacific is the federal government, (b) most of the water that’s being argued over starts as snow pack on federal land, and (c) the federal courts have consistently held that under the prior-appropriation water law common in the West, the federal government’s right predates all others, whether the federal government was diverting the water for a useful purpose or not. Trust me when I tell you that most state legislators in every one of those 11 states has been made fully aware of those facts at some point in time, when some state plan was screwed up by them.

87 Wayne Lusvardi October 17, 2014 at 9:08 am

The comments above are the best I have ever read on all sides of the issue of drought and pricing of water.

As someone who writes for a free market think tank on water, allow me to say that the Alex Tabarrok, and other self-described libertarian economists such as David Zetland, lack an understanding of how markets for water operate in California and most of the U.S. They don’t operate in a pure socialized system of cheap water nor in a private market. They come about by a market in water contracts.

Farming would become obsolete if all farmers had to compete with cities or each other in water market. Moreover, cities would entirely lack water for dry years without farmers paying to keep in place the massive California State Water Project and Central Valley Project supplying water for droughts.

Farming requires large upfront costs of buying large expanses of land, buying farm equipment, seed, cultivating land and borrowing capital from farm banks to undertake growing crops. For farmers to have to compete each day, month, or year for water in a competitive market would eliminate farming altogether because the certainty of the price of water to underwrite loans to farmers would not exist.

Additionally, to amortize the gigantic cost of building dams, reservoirs and aqueducts, bonds have to be issued and paid back over 50 years or so. Neither farming or building dams could occur if every farmer and city had to go into a “spot market” each day, month or year to buy water. The way the costs of the Federal Central Valley Project are paid back is by water rates to farmers. Those water rates have to be established based on cost, not based on market price. If they were based on market price, no bonds could every be issued to underwrite the construction of dams or aqueducts.

The solution to situation where there are large upfront costs is water contracts. 95% of system water is allocated by long term contracts. 5% of system water is allocated by water auctions or water transfers. In a drought, the 5% should be expanded to at least 10%.

Moreover, about 60% to 70% of the water for California’s farmers comes from system water and 30% to 40% from farmers’ own groundwater through a system of water rights. So if groundwater also had to be exposed to a “spot market” there would be economic anarchy and constant water warring.

Additionally, a glaring piece of misinformation by Mr. Tabarrow needs correction. Agriculture does not use 80% of all system water in California. According to the Cal Dept. of Water Resources, it uses 42% on average and only 28% in crucial dry years when water has to be stored up for future droughts. Conversely, wildlife refuges use 64% of all system water in drought years. Agriculture only uses about 17% of all rainfall each year on average.

There is a vibrant market for water in California. But it is a market in long-term water contracts and in private property rights to groundwater that can be traded between farmers or between farmers and cities.

The difference between the cost of water reflected in water rates and the price of water in water auctions during droughts is not a subsidy, contrary to water economists such as David Zetland and others. If every farmer and city in California had to go into a spot market to buy water both agriculture and cities would collapse or be subject to the water warring of the early 1900’s when William Mulholland took a shotgun toting army into Mono County to secure water it had bought from farmers who wanted to renege on their sale for hold out prices.

88 wa October 17, 2014 at 4:24 pm

Your definition of “use” is off. Water flowing through a river so that it remains a river is not being used by the river.

Also, farming in California should collapse. Farming in the desert makes no sense. But even if we wanted that foolhardy project to continue, your spot price analysis is specious. Plenty of businesses depend on commodities whose price fluctuates. That’s the reason the derivative contract was invented. Farmers should be very familiar with those instruments (under the name futures).

89 Michael Cain October 17, 2014 at 11:25 pm

Water flowing through a river so that it remains a river is not being used by the river.

Both California and federal law, upheld by both state and federal courts, regard water flowing in the river for ecology and species preservation as a “beneficial use.” You may not like it, but it’s the current state of the rules that everyone has to play by.

90 wa October 21, 2014 at 5:59 pm

If this were a court brief you’d have a point. It isn’t, so there’s no place for legalese.

91 Jeff October 17, 2014 at 9:37 am

California’s water shortage means better wine, so no complaining folks. Focus on what matters.

92 Wayne Lusvardi October 17, 2014 at 9:50 am

We don’t say that households have to go into a spot market each month or year to buy a house, so why do we say that farmers must go into a spot market for water? If there were no long term loan contracts for building and buying homes no new housing would be built or sold and there would not be such a thing as the real estate market. So again, why should farmers or cities have to buy water in auctions?

It is a libertarian fiction that taxpayers are paying water subsidies to farmers. There are no such water subsidies. The difference between the low water rates set by 50 year contracts for water and the spot market price for water in a 100 year drought is not a subsidy. Moreover, for the most part crop subsidies for rice and cotton and other crops in California are no longer necessary with the globalization of agricultural markets. Farmers can sell surplus crops in the global market and no longer need crop subsidies. The 2013 Congressional Farm Bill eliminated crop subsidies and replaced it with unsubsidized crop insurance programs.

93 wa October 17, 2014 at 4:25 pm

The 50 year contract rate was the result of a corrupt political deal, not arms length bargaining. Also prior appropriation is just dumb.

94 Art Deco October 19, 2014 at 11:19 am

The difference between the low water rates set by 50 year contracts for water

There’s a bit of lunacy right there.

95 Final word and only comment that counts October 18, 2014 at 4:16 pm

No water for Calif ag, no real food. ALL plant based food for people, not cattle, comes from California.

96 Nathan W October 19, 2014 at 10:20 am

A theory.

Probably the Latinos who man the farms don’t want to work in Georgia if they can work in California. People are nicer to Latinos there. A dollar an hour effective willingness to work effect would more than cover the cost of water.

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