Water Should Have a Price

The California drought has been taking over the news recently, and it seems to be a topic of conversation everywhere I go.  People already love to talk about the weather.  Now they get to include novel terms like mega-drought, water seizure, and ridiculously resilient ridge. (The water seizure appears to be a false alarm).  It is clear that collectively we want more water than we have, and that many trade-offs will have to be made.

In my view, it would be easier to evaluate the various trade-offs being discussed in water policy if water was priced more transparently.  For example, this article mentions that Westlands Water District recently offered to buy water from Oakdale Irrigation District for $400/acre-ft of water.  Last spring, Westlands offered $100/acre-ft.  For comparison, water from ocean desalination plants currently costs roughly $2,000/acre-ft.  Westlands is the largest agricultural water district in the US, and produces iconic California produce like almonds and pistachios.  The price numbers help illustrate the challenges Westlands faces.  Apparently farmers in Westlands can afford to buy water at a price four times what they paid a year ago.  Would they still be able to produce if prices quadruple again?  I'm not sure, but I personally would be willing to pay a bit more for tasty almonds if the price of water increases.  Under that logic, the drought seems to be painful but not catastrophic for the long-term future of California agriculture.

The need for water prices is also apparent when looking at water conservation and recycling.  While some consumers are facing increasing costs for water, others don't even know their own usage.  In Sacramento, only about 25% of homes have a water meter.  Residents without meters pay a flat rate, and increased water consumption is essentially free.  The reason for the limited metering?  The city doesn't want to pay for meters.  As a result, governments have ask people to conserve based on the honor system.

Prices are not a panacea.  Prices miss all kinds of market externalities.  They also can fluctuate widely in markets, like water, which are relatively illiquid.  Still, when attempting to make trade-offs and conserve water, prices are a good place to start.