Does California Need Rain, Rationing or Prices?

A water line is seen on the banks of Lake Cachuma where the water has receded, in Santa Barbara, California, on March 27, 2015. Lucy Nicholson/Reuters

California is in the midst of a crisis. Its gorgeous weather has turned against it as its fourth year of drought drags on. Looming water shortages are leading to calls for rationing and restrictions on water use.

The state has one year of water left, and 35-year mega-droughts ahead of it. The New York Times bleats, "Reservoirs are low. Landscapes are parched and blighted with fields of dead or dormant orange trees."

Why is there a water shortage? Almost every news story I've read blames the drought.

This sounds like a reasonable assumption, but just because the supply has contracted doesn't mean that there should be a shortage. In normal markets, when supply shrinks, the price rises and quantity demanded decreases to meet quantity supplied. People naturally use less when something costs more. They conserve and prioritize.

But if for some reason the price can't rise, usage won't change because the price isn't signaling facts about underlying scarcity and incentivizing different behavior. What made sense to do with a resource when it was relatively abundant—say, 40-minute showers and turning your lawn into a lake—might not make sense when it's scarcer. When the price is held down while supply and demand are changing, you end up with shortages, rationing and use regulations.

As Alex Tabarrok points out, California has plenty of water. What it doesn't have are prices—or rather, market prices. Although a lot of well-meaning people insist that water is a right, I notice that my "right to water" in no way changes the fact I have to pay the government monopoly for it ($44.91 last month). So even if there is a right to water, as Tabarrok quotes UCLA professor Matt Kahn, there is no natural right to always pay half a cent per gallon for it, regardless of supply or demand.

The price controls and subsidies for water use also have behavioral consequences:

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.

People in San Diego have lawns and cars and pour tons of water on them. And why not? It's cheap. But when water becomes scarcer, rather than raise prices to reflect this fact and encourage conservation, California cities resort to paternalistic rationing, issuing edicts about when you can water your lawn and how much and how clean your car can be.

"Water conservation" (by any means necessary, as long as they don't involve prices) is also the basis for the myriad of ludicrous federal regulations that have devastated our toilets and showers, as Jeffrey Tucker chronicles.

Prices aren't just a way to avoid shortages and use resources efficiently, as David Zetland explains in his wonderful little book Living With Water Scarcity. Markets treat consumers like free and responsible adults whose choices actually matter, rather than dictating to them what's "important" or "essential" for their own lives.

Prices generate revenues and reduce demand, but they also give customers choices. A regulation on outdoor watering may annoy a granny with flowers. A desalination plant may annoy environmentalists. An education campaign is condescending to some and a waste of breath on others. A campaign to install low-flow toilets may install sparkling receptacles in unused second bathrooms.

Prices send a direct signal at the same time as they accommodate many responses. Customers can choose their own mix of technologies and techniques. Some will take shorter showers. Others will install drip irrigation. Some will shower at work. Others will just pay more. A higher price for water, like a higher price for any commodity, allows people to choose how much water to use. Choice is a pleasant option compared to water shortages or tickets from water cops.

Markets can solve the shortage in California even if they can't make it rain, while water rationing won't do anything to alleviate the real problem because it exempts the biggest consumers. All the use restrictions are all a distraction—you could eliminate all car washes, showers and lawns and not make a dent, because urban consumers account for just a fraction of California's water consumption. The Economist notes (emphasis mine):

The first rule for staying alive in a desert is not to pour the contents of your water flask into the sand. Yet that, bizarrely, is what the government has encouraged farmers to do in the drought-afflicted south-west. Agriculture accounts for 80 percent of water consumption in California, for example, but only 2 percent of economic activity. Farmers flood the land to grow rice, alfalfa and other thirsty crops.

And while it may be sad that some of California's farms are struggling, there is no logical reason why the rest of the state needs to suffer to subsidize crops (and inefficient irrigation techniques) that wouldn't make economic sense if the farmers had to pay markets rates for water.

Tabarrok calculates that if farms used just 12.5 percent less water, Californians could theoretically increase the amount available for all industrial and residential uses by half.

Does that arrangement make sense? Probably not, but no planner or regulator could possibly decide how to weigh the demands of millions of people for water or any scarce resource. All we know is that we do not have enough water to satisfy everypossible use for it.

Only the price system is able to coordinate those countless actors, factors, plans, interests and industries. Maybe when California regulators turn on the tap and find it empty they'll realize this.

Daniel Bier is the editor of the blog Anything Peaceful on the Foundation for Economic Education website, which is where this article first appeared.

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