All Commentary
Monday, September 8, 2014

Liquid Assets

Market prices for water would compel creative conservation in a drought

“Wow, $4.30 a gallon for premium,” said my wife as we drove past a Shell station this summer.

I had read the previous day that gasoline was in relatively short supply amid uncertainty about oil production in Iraq. In California especially, gasoline supplies have been tight for several reasons, including California’s strict rules on vehicle emissions. And yet there were no lines at the Shell station, and no one stopped my wife and me to investigate how much gasoline we were using, or the purpose of the car trips we were using it for.

Both in Maryland where we live, and across the country in California, drivers are allowed to buy as much gasoline as they want, every day of the week if they wish, and use it on any purposes they choose. No one checks up on anybody to make sure that gasoline goes to its most important uses. No one frets that we’ll all burn so much gasoline for unimportant purposes that we’ll have none left for important purposes.

With water, in California now, things are different.

The Wall Street Journal reported this summer on the work being done in California these days to make sure that the limited supplies of water there are being used sensibly. Like most western states outside the Pacific Northwest, California is naturally dry. Even in average years, it gets less rain and snowfall than necessary to provide everybody there with all the water they’d like. And periodically, like now, it suffers droughts when there is even less water to go around.

In response to the drought, the Wall Street Journal says, inspectors are traveling around residential areas checking on water use. In many areas certain uses of water, such as for watering lawns or washing cars, are prohibited, or else allowed on only a few days of the week. Neighbors monitor and report on their neighbors’ water use, and occasionally the water authorities fine people who use too much water, or use it in unapproved ways.

Despite all the restrictions, informing, and fines, there is still real concern that Californians will run out of water for important uses. Indeed, there is not enough water now to irrigate all of California’s crops. About 400,000 acres of cropland sit idle.

The contrast between the allocation of gasoline and the allocation of water in the West presents a puzzle. Here are two valuable goods, both insufficient in quantity to satisfy all the uses people have for them. In that they are alike. But how we determine who uses how much of each, and for what purposes, is very different.

Why? What’s the underlying difference?

At root, the difference is that gasoline is privately owned while water is government owned. Hence gasoline is freely bought and sold on competitive markets, while water is sold by government agencies with local monopolies. This makes all the difference: Gasoline is bought and sold at competitive market prices, while water is sold at government-set prices. That’s why the gasoline market is orderly and the water “market” is disorderly. The necessary foundations of economic order—private ownership and free exchange—are lacking for water, hence water “markets” lack market prices—those precious signals that tell us all what to do to stay well coordinated with others.

Consider the “$4.30 a gallon for premium” that my wife remarked on. That price tells a story to all who see it. About 20 cents a gallon higher than it was a few weeks before, it told us that the amount of premium being produced was a bit less, relative to the amount people want, than it was a few weeks before. It does not tell us why—it might be that less was being produced or that more was desired (perhaps for fueling SUVs for family vacations)—but it does tell us that for some reason, each additional gallon of gasoline was worth more that day than it used to be.

Every possible use of premium gasoline that’s not worth at least $4.30 a gallon (or whatever the price might be in the local area) gets screened out, eliminated, effectively prohibited by that market price.

There again is the magic of the spontaneous, unplanned, astonishingly smooth and orderly operation of the market price system. When market prices rise, without an order being given, thousands of people cut back on their consumption. They stop using gasoline for less important purposes. It’s a marvel.

Now what about water in drought-stricken states? Water prices are set by “authorities” at arbitrary prices that don’t change to reflect water availability. The authorities allocate water to various uses.

But how can the Water Resources Control Board know which purposes are most important? And most important to whom? Are a few more strawberries more important than keeping the lawn and garden green? Doesn’t that depend on whether the strawberries are more important to those who eat them than the beauty of the lawn and garden are important to the homeowner? How can the water board make that judgment? And might a car buff not care so ardently about keeping his car spotless that using the water to wash his car is actually more important—to him—than either the strawberries or the freshness of the lawn and garden?

How can a government agency know the importance of all possible uses of water to all possible users?

It can’t.

So is there any way for society to make sure water does go to the uses its people consider most important? Yes, there is. Use market prices, as with gasoline. Get governments out of the water business. Let private individuals and companies own, supply, buy, and sell water in pursuit of profit so that market prices for water emerge. The more scarce the water, the more the private owners will be able to charge for it. As prices rise, every water use whose importance can’t justify that water’s price gets eliminated. According to the values of the person contemplating it, that use is now “prohibitively expensive.”

We don’t need bureaucrats to prohibit unimportant water uses any more than we need them to prohibit unimportant uses of gasoline. Free market prices under private ownership and supply can do that for us.