Daniel Sutter: How to Turn a Drought into a Disaster


California is in the midst of a severe, protracted drought that is producing significant costs and conflicts. The unreported story, however, is how our politicized system of water allocation exacerbates these impacts. The costs of politicized water extend across the nation.

Californians are using cell phone cameras and social media to report violators of water use restrictions. Actor Tom Selleck, for instance, was accused of stealing water for his avocados. It turned out that Magnum, P.I., was paying for the water he was taking from a fire hydrant.

The main conflict in California pits farmers against other users. Water has many uses beyond watering crops and lawns and filling swimming pools. The computers powering the internet generate lots of heat, and Google uses chilled water to cool its servers. Electricity generation requires considerable water, not just for hydroelectric power, but also when using coal and nuclear power: electricity for a 60 watt lightbulb for a year requires 3,000 to 6,000 gallons of water. Ethanol requires four gallons just to refine one gallon, in addition to growing the corn.

Our nation’s water problems, including the conflict news stories describe, result in large part from a failure to use property rights, voluntary exchange, and prices to allocate water. California’s drought is Mother Nature’s doing, but the economic costs and political conflict are largely on us.

Farmers have water rights, but not full property rights. They can divert water but only to use it for irrigation. Farmers’ rights to use water can be suspended if river levels fall too low, as determined by bureaucrats. Without water for irrigation, farmers’ crops will fail. Farmers cannot trade (sell) water that they could use for irrigation to Tom Selleck for his avocados or Google for their server farms. A bureaucrat decides what happens to the water, and the result is conflict.

Competition for water results because resources are scarce. Scarcity means that our wants and desires exceed our ability to produce goods and services. Economists often praise markets and prices for directing scarce resources to their most highly valued uses, which we call efficiency. Although markets cannot eliminate scarcity, they structure interaction to focus on cooperation and minimize conflict.

Consider how the allocation of water contrasts with homes. California is home to some of the nation’s priciest communities, including Malibu on the Pacific Ocean. Homes in Malibu are in great demand, but can be bought and sold. Actor Jeff Bridges recently listed his estate for $29 million, to effectively let someone else get to live in Malibu. But Mr. Bridges will probably be happy if his home sells for the list price, in contrast with the farmers who might lose their water and get nothing in exchange.

Such politicized allocation is the norm across the U.S. The city of Troy charges for water, but at a price determined by politicians and not markets. And communities employ orders to reduce water use. Troy currently has a voluntary odd-even lawn watering restriction in place. Such restrictions ramp up when drought conditions worsen, eventually becoming bans. A market approach would raise the price and let people decide if they want to pay perhaps $1,500 a month for a green lawn. We use high prices to clear the market for homes in Malibu, where an 800 square foot beachfront house recently sold for $5 million. I was not a bidder.

Our system of politicized water allocation has immense costs, which I will discuss further in the future. The potential exists to use voluntary exchange for water. Economists like Terry Anderson of Montana State University and Nobel Prize winner Vernon Smith have described how rights and markets could work for surface and ground water respectively. Indeed, water market innovations designed by Anderson and his colleagues have improved both economic efficiency and environmental protection.

Hopefully a weather pattern change will bring California’s current drought to an end soon. But should the drought continue, remember that much of its pain is from politically self-inflicted wounds.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at dsutter@troy.edu and like the Johnson Center on Facebook.


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