Results for “water” 1034 found
The Misallocation of Water
One of the most remarkable discoveries of economics is that under the right conditions competitive markets allocate production across firms in just that way that minimizes the total costs of production. (You can find a discussion of this remarkable property in Modern Principles. See also this MRU video.)
One of the necessary conditions for this result is that firms must face the same input and output prices. If one firm is subsidized and another taxed, for example, then resources will be misallocated and total costs will increase. In a pioneering paper, Klenow and Hsieh measure misallocation across firms in China, India and the United States and they find that micro misallocations can have large, macroeconomic effects. In particular, if capital and labor were allocated as well in China and India as they are in the United States then output in those countries would double.
We can get some intuition for the costs of resource misallocation by looking at water in California. As you may have noticed at the grocery store, almonds are in demand right now whether raw or in almond milk. Asian demand for almonds is also up. As a result, in the last 10 years almond production in California has doubled. That’s great, except for the fact that almond production uses a huge amount of water and water in CA is severely mispriced and thus misallocated.
In my previous post, I pointed out that agriculture uses 80% of the water in California but accounts for less than 2% of the economy. So how much water does almond production alone use? More water is used in almond production than is used by all the residents and businesses of San Francisco and Los Angeles combined. Here’s a chart from Mother Jones:
(Aside: Some of this water is naturally recycled so net use is likely somewhat lower but a lot of water in California is now being pumped from the aquifer and that water isn’t being replenished.)
At the same time as farmers are watering their almonds, San Diego is investing in an energy-intensive billion-dollar desalination plant which will produce water at a much higher cost than the price the farmer are paying. That is a massive and costly misallocation of water.
In short, we are spending thousands of dollars worth of water to grow hundreds of dollars worth of almonds and that is truly nuts.
Hat tip: Walter Olson.
The Economics of the California Water Shortage
The NYTimes has an article on California’s extreme water drought with the usual apocalyptic imagery (see the video especially):
California is facing a punishing fourth year of drought. Temperatures in Southern California soared to record-high levels over the weekend, approaching 100 degrees in some places. Reservoirs are low. Landscapes are parched and blighted with fields of dead or dormant orange trees.
The apocalyptic scenario needs to be leavened with some basic facts.
California has plenty of water…just not enough to satisfy every possible use of water that people can imagine when the price is close to zero. As David Zetland points out in an excellent interview with Russ Roberts, people in San Diego county use around 150 gallons of water a day. Meanwhile in Sydney Australia, with a roughly comparable climate and standard of living, people use about half that amount. Trust me, no one in Sydney is going thirsty.
So how much are people in San Diego paying for their daily use of 150 gallons of water? About 78 cents. As Matt Kahn puts it:
Where in the Constitution does it say that the people of California have the right to pay .5 cents per gallon of water?
Water is such a small share of most people’s budgets that it could double in price and the effect on income would still be low. Moreover, we don’t even have to increase the price of water for residential or industrial uses. As The Economist points out:
Agriculture accounts for 80% of water consumption in California, for example, but only 2% of economic activity.
What that means is that if agriculture used 12.5% less water we could increase the amount available for every residential and industrial use by 50%–grow those lawns, fill those swimming pools, manufacture those chips!–and the cost would be minimal even if we simply shut down 12.5% of all farms.
Moreover, we don’t have to shut down that many farms, we just have to shut down the least valuable farms and use water more efficiently. If you think water is cheap for San Diego residents it’s much cheaper for 
farmers. Again from The Economist:
Farmers flood the land to grow rice, alfalfa and other thirsty crops….If water were priced properly, it is a safe bet that they would waste far less of it, and the effects of California’s drought—its worst in recorded history—would not be so severe.
Even today a lot of CA agriculture uses the least efficient flood irrigation system.
According to data from the state Department of Water Resources, 43 percent of California farmland in 2010 used some form of gravity irrigation, an imprecise method that uses relatively large amounts of fresh water and represents a big opportunity for water conservation.
The NYTimes article is worried about farm loss:
“I’m going to fallow two acres of my land immediately,” said Geoffrey C. Galloway, who has a citrus grove on his ranch near Porterville, in the Central Valley. “Depending on how the season goes, we may let another four go.”
…Last year, at least 400,000 acres went unplanted, and farmers reported losses of $2.2 billion, said Mr. Wenger, the head of the farm bureau, who owns a farm in Modesto. “This year we could see easily 50 percent more,” he said. “We are probably going to be looking at well over a million acres.”
California has approximately 25 million acres of farmland. And while our bodily fluids might be precious not every acre of farmland is. A few less acres of farmland producing low value crops in return for a lot more water is a very acceptable tradeoff.
Addendum: Low prices are not always wasteful. David Zetland’s short primer on water policy is available for free as pdf. Matt Kahn’s Fundamentals of Environmental and Urban Economics is on Amazon for Kindle for just $1. Both are very good.
Addendum 2: See also this later post, The Misallocation of Water.
Most water problems can be solved by better property rights and higher prices
In his 2011 book Brahma Chellany reports:
…Singapore has pursued demand management through greater water productivity and efficiency. By plugging system leaks and inefficiencies and raising the price of domestic water, with the tariff and tax rising steeply after the first 40 m3 a month, it managed to reduce household water use by about 10 percent since the mid-1990s to about 155 liters per person per day in 2011. That consumption level is nearly four times lower than that of an average American.
That is from Water: Asia’s New Battleground, which is actually one of the most interesting political economy books published in the last few years.
California’s Water Shortage
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.
How do moles smell underwater?
Blowing Bubbles
I was pleased to see the mention of the star-nosed mole in Nick Richardson’s review of Ned Beauman’s latest novel (LRB, 17 July). Richardson informs us that this marvellous creature ‘can smell underwater’. True, but not thanks to the ‘nose’ that gives it its name. The 22 fleshy appendages that protrude from the mole’s face are not an olfactory organ at all, but a skin surface containing more than 100,000 sensory neurons – it’s the most acute touch organ of any mammal on the planet and about six times more sensitive than the human hand. In order to ‘smell’ underwater – a phenomenon long thought impossible in mammals – the mole exhales air bubbles over objects then reinhales them, allowing odorant molecules in the bubbles to pass over the olfactory receptors.
Sarah Murray
Esher
The link is here, pointer from Hugo Lindgren.
Blackwater in Iraq, and the loyalties of the American Embassy
Everyone else is covering this, still it seems worthy of mention in this space too:
Just weeks before Blackwater guards fatally shot 17 civilians at Baghdad’s Nisour Square in 2007, the State Department began investigating the security contractor’s operations in Iraq. But the inquiry was abandoned after Blackwater’s top manager there issued a threat: “that he could kill” the government’s chief investigator and “no one could or would do anything about it as we were in Iraq,” according to department reports.
American Embassy officials in Baghdad sided with Blackwater rather than the State Department investigators as a dispute over the probe escalated in August 2007, the previously undisclosed documents show.
The full story is here, and also it seems the U.S. government is trying to put that reporter in jail for his work. And here is my 2007 column on Blackwater: “Private contractors may not respect virtue for its own sake, but like most businesses, they will respect the wishes of their most powerful customers, in this case governments. What is wrong with Blackwater may, most of all, mirror what is wrong with Uncle Sam.”
Addendum: The documents by the way are here. Check out p.6, it reads to me a bit less threatening, and more commentary on the chaos of Iraq, than some accounts are making it out to be.
*Water 4.0*
That is the new book by David Sedlak and the subtitle is The Past, Present, and Future of the World’s Most Vital Resource. I found this consistently interesting, going well beyond the usual anecdotes one finds in the other general “history of water” books. Here is one bit about Japanese water relations being Coasean in earlier times:
In Japan, human wastes were separated prior to recycling. Fecal matter was the more valuable commodity, because solids were easier to transport. In the first stage of the recycling process, landlords sold the feces in their tenants’ cesspools to merchants who were members of a guild that had secured the right to collect the wastes from that part of the city. The wastes were so valuable that the rent of an apartment would increase if the number of people living in the house, and hence the amount of solid waste produced, decreased. When it came time to renegotiate the price for the wastes, the guilds sometimes fought with each other for the rights to buy the increasingly valuable fertilizer.
Urine — the less prized waste — was still a marketable commodity. Because of its lower value, tenants, who owned the rights to their urine, sold it to a group of merchants who were not part of the fecal waste guild.
That discussion, by the way, is drawing upon this S.B. Hanley piece.
Recommended.
The Private Rationality of Bottled Water Drinking?
That is a new paper by W. Kip Viscusi, Joel C. Huber, and Jason Bell, the abstract is here:
This article examines evidence for the private rationality of decisions to choose bottled water using a large, nationally representative sample. Consumers are more likely to believe that bottled water is safer or tastes better if they have had adverse experiences with tap water or live in states with more prevalent violations of EPA water quality standards. Perceptions of superior safety, taste, and convenience of bottled water boost consumption of bottled water. Blacks and Hispanics are more likely to drink bottled water due to their relatively greater exposure to unsafe water and greater risk beliefs. The coherent network of experiences, beliefs, and actions is consistent with rational consumer choice.
That is rationality at the margin, of course, as the entire practice of bottled water in developed countries strikes me as not rational for most people. Tap water is fine and to me even tastes better.
Hat tip goes to www.bookforum.com.
The new Israeli export: water technology
The Israeli water industry took over the convention center here this week to show the world its bacterial sewage scrubbers and computerized shower heads, its low-flow nipples to grow high-yield tomatoes, and its early-warning mathematical algorithms to detect dribbles, leaks and bursts.
It might not have been the sexiest business conference in a country that refers to itself as “start-up nation,” but there’s a lot of money in water.
Israel wants to be seen in the water world the same admiring way it is viewed in the realm of high-tech. The country’s exports of water products have tripled in the past five years and now total $2 billion, according to Israel’s economic ministry. Its biggest customer is the United States, but new markets are opening in countries with an emerging middle class, such as Mexico, Turkey, China and India.
Because of Israel’s history of scarcity, isolation and resourcefulness, it has the jump in water management and conservation.
Here is more, and it is time to have a good long read article on Israeli water policy and technology. Here are three bits:
Israel recycles more than 80 percent of its effluents, compared with about 1 percent in the United States, the governor said.
And:
Israel is a world leader in desalination of seawater. By next year, more than a third of Israel’s tap water will come from the Mediterranean Sea and a few briny wells. Israel’s total water consumption remains nearly at 1964 levels — even though its population has quadrupled to 8 million people, according to the economic ministry.
And:
There are 280 water technology companies in Israel.
Here is further background on Israeli water policy. One obvious element here, of course, is that water policy for Israel is a matter of national security.
“Peak water” for the Middle East
The situation is most serious in the Middle East. According to [Lester] Brown: “Among the countries whose water supply has peaked and begun to decline are Saudi Arabia, Syria, Iraq and Yemen. By 2016 Saudi Arabia projects it will be importing some 15m tonnes of wheat, rice, corn and barley to feed its population of 30 million people. It is the first country to publicly project how aquifer depletion will shrink its grain harvest.
“The world is seeing the collision between population growth and water supply at the regional level. For the first time in history, grain production is dropping in a geographic region with nothing in sight to arrest the decline. Because of the failure of governments in the region to mesh population and water policies, each day now brings 10,000 more people to feed and less irrigation water with which to feed them.”
Brown warns that Syria’s grain production peaked in 2002 and since then has dropped 30%; Iraq has dropped its grain production 33% since 2004; and production in Iran dropped 10% between 2007 and 2012 as its irrigation wells started to go dry.
“Iran is already in deep trouble. It is feeling the effects of shrinking water supplies from overpumping. Yemen is fast becoming a hydrological basket case. Grain production has fallen there by half over the last 35 years. By 2015 irrigated fields will be a rarity and the country will be importing virtually all of its grain.”
The article also offers a pessimistic assessment for China, India, and parts of the United States. Please note that Julian Simon fans should feel no need to rebel against these assessments, which are for resources with no or ill-defined property rights. When it comes to the Middle East and India, it is easy enough to see how institutional constraints might limit possible technological solutions to this problem.
Subsidies for virtual water
From Robert Glennon:
In 2012, the drought-stricken Western United States will ship more than 50 billion gallons of water to China. This water will leave the country embedded in alfalfa–most of it grown in California–and is destined to feed Chinese cows. The strange situation illustrates what is wrong about how we think, or rather don’t think, about water policy in the U.S.
Here is more, and for the pointer I thank the estimable Chug.
Water Economics
The next set of lessons in MRUniversity’s development economics course is on water economics. Water is one of the most important issues in developing countries for many reasons, including agriculture, health, and wealth. Every year, millions of people die because of lack of access to clean and safe water. It is estimated that over 1 billion people in the world don’t have adequate access to such an essential resource, and the poor pay the biggest price.
In this section, we cover:
- The effects water monopolies can have on consumers
- The pros and cons of water privatization in developing nations, including major examples from Buenos Aires, Bolivia, Saudi Arabia and Yemen
- Why it’s so hard to regulate private water companies effectively
- What can happen to the price of water when it is interfered with through subsidies and price controls
- The tragedy of the commons in water economics
- How water ethics influences the actual supply of water
- And finally, what happens when countries engage in trading water commodities
Have the French shown that water privatization is dead?
Some time ago, @ModeledBehavior has requested comment on this article. Excerpt:
Across the nation cash-strapped municipalities are considering the sale of their public-utility systems. These moves are intended to raise cash and rid the municipalities of expensive liabilities such as debt service and pension obligations. But officials considering this approach might do well to look to France and other nations that are rapidly moving in the opposite direction with a “remunicipalization” of their utility systems. In 2010, Paris, in the best known case of remunicipalization, ended contracts with the world’s two biggest water service companies, Suez and Veolia, bringing an end to their 100-year private duopoly. The reversal of a century-old practice in Paris was an acceleration of an international movement away from private control.
So what’s up? I see it this way. For advanced water systems, there is no cost advantage to having a privatized system. It is a regulated monopoly and over time it acquires skill in manipulating the political process, most of all its regulators. Why expect lower costs and prices? A wide variety of studies of this topic, including studies by “market-oriented” economists, find no cost advantage for the private sector in this setting.
For very poor countries, very often water privatization would in principle be a good idea, since the public sector is not supplying much piped water at all. Monopoly is better than carrying a bucket on your head, and you still can carry the bucket if you wish. Yet privatization also won’t get very far in many of these cases. One reason is that there is no way to make people — many of whom are non-registered and lacking in assets — pay their water bills, and not enough legal infrastructure to prevent them from cutting into the pipes or otherwise going rogue. You shouldn’t “blame” privatization here, but still it may not be a useful option.
Finally, there is a sweet spot in the middle, often for reforming or middle-income countries. In those cases water privatization can mobilize private capital rapidly and expand water coverage. It often brings higher quality water, higher quality connections, lower rates of unaccounted-for-water, and higher prices. Not all cities desire that trade-off, but it is there for the taking. Some of these privatizations are done fairly well, others are done very poorly, such as in Cochabamba, where the “privatization” gave the company property rights over previously privately held, decentralized water sources of the poor, such as collected rain.
As long as there are countries in this middle income range, water privatization is not dead nor should it be.
The economics of cholera (water)
From Haiti:
Recently, just behind the base’s barbed-wire periphery, Dieula Sénéchal squatted with her skirt hiked up, scrubbing exuberantly colored clothes while a naked 6-year-old girl, Magalie Louis, defecated by the bank, gnawed on a stalk of sugarcane and then splashed into the water to brush her teeth.
Approaching with a machete on his way to hack some cane, her gap-toothed father, Légénord Louis, said Magalie had contracted cholera late last year but after four days of “special IVs” was restored to health. He knew the river water was probably not safe, he said, but, while they brushed their teeth in it, they did not swallow.
For drinking water, Mr. Louis said, his family relies on a local well. But he lives from hand to mouth and cannot afford water purification tablets; the free supply he got in 2010 ran out long ago. So he gambles.
“If you make it to the hospital,” he said, “you survive the cholera.”
The NYT feature article is interesting throughout.
It’s already dead in the water
“Right now, there is not much more than a blank sheet of paper and even the name of the future treaty might still change,” said Petr Necas, the prime minister of the Czech Republic. “I think that it would be politically short-sighted to come out with strong statements that we should sign that piece of paper.”
There is so much more at the FT link, and from numerous countries. Of course on day one they were all going to say it is great and that they support it. Then the new equilibrium is revealed.
Rising in status: Timur Kuran’s theory of preference falsification, Buchanan and Tullock’s Calculus of Consent, Thomas Schelling’s Strategy of Conflict.
Falling in status: French rationalist constructivism, claiming that the failures of social democratic multinational collective governance stem mainly from a misguided belief in fiscal austerity.