February 25, 2007
The Science and Economics of Water Shortage
The Science and Economics of Water Shortage--Posner
The shorter the supply of a natural resource, the more important it is to have an institutional structure for allocating it efficiently among demanders, both present and future. In this respect usable fresh water is not fundamentally different from other scarce resources, such as oil and gas. The qualification in "usable" is important. Global warming does not diminish the world's supply of fresh water, but it reduces the supply of usable fresh water. Spring snowmelt is an important source of fresh water in many parts of the world, including California. That source will diminish as rising global temperatures cause more precipitation to take the form of rain rather than snow--and rain is much harder to collect and distribute than the spring runoff from melting snow. Higher global temperatures also increase the demand for water, as does an increasing, and increasingly prosperous, global population.
Of course, in principle, an increase in the demand for a good relative to its supply is not a problem. Price quickly rises, reducing demand and thus reestablishing equilibrium; so no more shortage. In the slightly longer run, moreover, the higher price leads to increased supply; in the case of water, one can anticipate greater use of desalination, that is, converting sea water into fresh water. Between water conservation by consumers trying to reduce their water bill, and increased supply of fresh water by the water industry, there should be no shortage, in the sense of an imbalance between demand and supply resulting in queuing, black markets, degraded quality, technological stagnation, politicking (Becker mentions discrimination in water pricing in favor of households and farmers), and corruption.
The problem is that the market in fresh water is inefficient. Becker focuses on the inefficient pricing of publicly owned water supplies--for example, charging a flat rate regardless of the quantity consumed, or failing to take account of reutilization (that is, the consumption of return flow). But a deeper problem is the institutional structure. One aspect is public ownership of water systems. There is no reason why a city should own the water company any more than it should own the cable television company. It is true that these are both networked services and therefore have aspects of natural monopoly; it would be wasteful to have multiple grids of water pipes in the same city. But through the contractual process a city can exploit "competition for the market"--that is, it can award a contract for the sale of water to whatever provider offers the best deal for the city's residents.
A still deeper institutional problem is the inefficient system (or systems) of property rights in water. In the western United States, where water is scarce, users obtain a property right by "appropriation," that is, by actually using water from a lake or stream. The amount they take is recorded and that is their property right. Any return flow can be appropriated by a downstream user. Now suppose an upstream user wants to sell his appropriation. He cannot do so without getting the consent of any downstream user who may be adversely affected by the sale because he had appropriated a portion of the upstream user's return flow. There may be many of those users, thus greatly increasing the transaction costs of reallocating water to a higher-valued use. In addition, because ownership of water rights is based on use, there is no incentive to hold water off the market, for future use; if one doesn't use the water one has appropriated, one loses one's property right.
The basic problem is that the same resource is jointly rather than singly owned, so that before it can be sold there must be a transaction among the owners, and the more owners, the higher that initial transaction cost. The problem is greatly exacerbated when an interbasin transfer is being contemplated, that is, a transfer of water from one watershed to another. For then all the users of return flow in the originating watershed will be deprived of their water.
Such problems are not unique to water, and are not insoluble. A parallel problem in oil is solved by unitization. Very often a number of separate oil companies will be drilling into the same underground oil field, and each has an incentive to take as much as it can as fast as it can (for example by drilling more wells), for what it leaves in the ground will be taken by other companies. The oil-producing U.S. states authorize "compulsory unitization," whereby if two-thirds of the owners of the land above a common oil field vote to conduct their operations under common management, the rest are bound. (Requiring unanimity would created serious hold-out problems.) A similar regime might be feasible for the users of a lake or stream. This would eliminate the inefficiency of a possession- or use-based system of property along with the inefficiencies associated with joint ownership.
In short, the solution to water shortages is likely to be privatization and intelligently designed property rights, using the institutional framework of natural resources such as oil, gas, coal, and other mineral resources as a model. This solution seems, moreover, as apt to African nations facing acute water shortages as it is to the milder problems of U.S. water supply.
How to Conserve Water Efficiently-BECKER
The sharp rise in world population and income during the past five decades has stimulated greatly increased demand for clean water, and concern about whether the supply of water would be adequate to meet these needs. Demand for usable water in the future will surely continue to grow at a significant pace unless steps are taken to reduce demand, while the supply of water could grow more slowly, especially if global warming reduced rainfall and increased evaporation of water. The best way to bring demand into balance with supply is to introduce much more sensible pricing of water consumption than is common in most countries.
Many discussions of water conservation create the impression that households are large and inefficient users of clean water for drinking, eating, bathing, and toilet flushing. That is a myth. About 40 per cent of all the freshwater use in the United States is for irrigating land for agriculture, another 40 percent is used to produce power, and only 8 percent is used for domestic use; these percentages are similar in other countries. Moreover, about a third of all the water used by households in rich countries goes to water lawns and for other out door purposes, so probably no more than about 5 per cent of the total demand for water is for personal use.
Water used is usually a poor measure of the net amount of water consumed since much water is returned either immediately, or after evaporation and condensation, to the source pool, where it can be used again. Thermoelectric plants use a lot of water for cooling purposes, but typically have a very high reutilization rate (about 98 percent). Household use is also efficient, with a reutilization rate of about 75 percent. As a result, neither power producers nor households are big net consumers of water. Irrigation of farmland absorbs much water since most irrigation systems have low reutilization rates. In California, the biggest water using state, irrigation systems have a reutilization rate of only about 40 percent.
Governments usually try to close the gap between the supply and demand of usable water by command and control policies that regulate water use, usually starting with households. Many local governments have introduced requirements for low flow toilet flushes, bans on lawn watering except during certain hours or days, requirements for more efficient household outdoor watering systems, and other water conserving regulations. None of these regulations do anything to economize on the water used by farmers and industry, the main demanders of water.
Water is wasted in many ways by all sectors, and regulations do nothing to affect the main source of wasteful use of water: the inefficient pricing of water. Most irrigation systems in the world price water through annual flat fees, and not through charges that rise with the water consumed. Often domestic water use is not priced at all, and when priced, flat fees are far more common than fees that depend on use. As with any other scarce good, water is wasted when the cost of using more is negligible.
The obvious solution is to implement fees that rise with the amount of water demanded. Such fees are especially important in the agricultural sector since farming is a heavy consumer of water. Consumption ideally would be defined as net use after reutilization is accounted for. With this measure, the fee per gallon of water used would be low to power plants since they recover almost all the water they use. Farmers would tend to pay a lot both because they typically use much water, and also because most agriculture irrigation systems do a poor job of recovering the water used.
Fees that rise with consumption would reduce the demand for water partly by cutting demand. For example, households would water their lawns less frequently, and sometimes would replace natural grass with artificial grass, or with rock gardens and trees, Farmers would cut their demand for water by switching away from crops that require much water, such as rice, toward crops that need less, such as wheat. They would also switch to more efficient irrigation systems, such as spraying and dripping rather than flooding (which is the cheapest), if the price of water took account of reutilization rates. With proper water pricing, California and other regions that need expensive irrigation system to grow rice and other water-intensive crops would switch to other crops, or to other uses of their land, so that water-intensive crops would become more concentrated in areas with abundant water supplies. More generally, with sensible water pricing in different countries, arid parts of the world would not grow food that absorbs much water, and would shift to other crops and activities that they would exchange for these foods.
Some opponents of effective metering of water demand claim that it would not reduce the use of water because of the mistaken belief that most of the water used goes to households for drinking and personal hygiene. The demand for water for personal use may not be very responsive to price, but households in developed countries use lots of water for lawns and swimming pools that would be sensitive to the price of water. Also public and private golf courses and some other recreational facilities require much water, and these uses too would respond to higher water costs. Clearly, the use of water in agriculture and industry would be sensitive to its price.
Effective water pricing is even more important to poor countries since they cannot afford expensive methods of increasing the supply of usable water, such as desalinization, and since a large fraction of their water is used in agriculture with inefficient irrigation systems. Yet most poor countries make little effort to price water sensibly.
Implementation of significant fees is not easy politically since households and farmers believe they have a right to as much water as they can get. In particular, farmers in richer countries are well organized politically, and often resist efforts to raise the cost of water they use to irrigate their land. Perhaps their opposition could be weakened if they received generous reductions in their water fees when they introduce irrigation systems with high reutilization rates.