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Market Pricing vs. Water ‘Shortages’

For years, water scarcity in Florida had not gotten the national attention it deserves. That changed when the U.S. Supreme Court agreed in November to hear Florida’s lawsuit against Georgia in which Florida maintains that Atlanta’s demand for water from the Chattahoochee and Flint river basins has led to the collapse of the oyster beds in Apalachicola Bay.

Florida’s water woes are not unique, and they’re certainly not confined to Apalachicola Bay. Nor is Georgia’s heavy use of shared rivers the nation’s only regional water problem.

Prolonged dry spells in the Southeast have pummeled farmers, triggered finger-pointing between rural and urban users, led to progressively confrontational legal battles between states over water rights, and raised questions about water usage by golf courses, suburban homeowners, and energy producers. In California, the ongoing drought has shrunk the state’s reservoirs and cut the amount of hydroelectric power generated there by about a third.

The U.S. Government Accountability Office reported this year that 40 of 50 state water managers expect shortages in some parts of their states under average weather conditions in the next ten years as our lakes, rivers, and aquifers are emptied.

Water shortages seem to be complicated and mysterious, perhaps caused by population growth, climate change, or both, with no obvious solution beyond deputizing “water police” to fine people who waste water by sprinkling driveways, sidewalks, and streets, or requiring “low flow” toilets. Such approaches to water conservation treat symptoms rather than causes.

The basic problem is almost absurdly simple: water is underpriced. Consumers and businesses thus have almost no incentive to use it wisely.

In the western United States, the federal Bureau of Reclamation (BOR) allocates disproportionate amounts of the water it controls to agricultural uses and charges farmers lower prices than would prevail in a free and open market. BOR’s wholesale prices to municipal water systems likewise are below competitive market levels, which leads homeowners to engage in turf wars over who has the lushest lawn in residential areas reclaimed from desert environments.

Farmers account for 80 percent of the nation’s total freshwater consumption. Roughly half of the more than 60 million acres of irrigated farmland across the United States relies on a method known as flood irrigation, in which fields are flooded with water. Because water for agricultural use is artificially cheap, farmers continue to grow more corn, alfalfa, rice, and other thirsty crops than otherwise, straining water resources. The biofuel industry thrives because of such subsidies.

Nuclear power uses about ten gallons of water per million Btu, while creating ethanol from corn requires a thousand gallons of water on average to generate the same amount of energy. Although nuclear-power plants consume more water than do fossil-fuel plants, they use only about one-fifth of the water required by solar-thermal farms.

Underpriced water also lets the owners of coal-fired power plants, which require large amounts of water for cooling, to delay switching to more water-efficient natural-gas turbines for generating electricity. Hydraulic fracturing of shale deposits can be done with saltwater or even carbon dioxide rather than freshwater, but artificially cheap water raises the costs of employing such alternative technologies.

As every college sophomore knows, shortages cannot persist in a market as long as prices can adjust to equate supply and demand. During a drought or when, for any other reason, the demand for water exceeds the available supply, prices predictably rise. Price increases in turn provide incentives both for consumers to economize on water use and for suppliers to increase the amount offered for sale. Hey presto! The temporary water shortage evaporates because all market participants face the true cost of its use.

Markets are essential for promoting conservation and investments in water-saving technology as well as for steering water to its highest-valued use. Barring action to replace allocation of subsidized water by bureaucratic fiat with market processes, shortages will become even more widespread and more politically contentious as special-interest groups lobby for priority. A market that sets water prices is the obvious solution.

William F. Shughart II is Research Director and Senior Fellow at the Independent Institute, J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.

From William F. Shughart II
TAXING CHOICE: The Predatory Politics of Fiscal Discrimination
So-called “sin taxes”—the taxing of certain products, like alcohol and tobacco, that are deemed to be “politically incorrect”—have long been a favorite way for politicians to fund programs benefiting special interest groups. But this concept has been applied to such “sinful” products as soft drinks, margarine, telephone calls, airline tickets, and even fishing gear. What is the true record of this selective, often punitive, approach to taxation?