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Fix the California Water Crisis for Less Than a Penny A Gallon
We’ve been hearing about the water shortage all year. If you’ve watched any of the Tour of California Bike Race, you may have seen them pass a reservoir with vastly less water than is typical this time of year. Blogger Scott Alexander decided to do an assessment of the water shortage to find if there was a simple solution. First, he figured out how California uses its water and created this helpful graph in millions of acre-feet (MAF):He then assessed home water consumption:
All urban water consumption totals 9 million acre-feet. Of those, 2.4 million are for commercial and industrial institutions, 3.8 million are for lawns, and 2.8 million are personal water use by average citizens in their houses. In case you’re wondering about this latter group, by my calculations all water faucets use 0.5 million, all toilets use 0.9 million, all showers use 0.5 million, leaks lose 0.3 million, and the remaining 0.6 million covers everything else – washing machines, dishwashers, et cetera.
In comparison, alfalfa farming alone uses an amazing 5.3 million acre-feet, which means that if:
…all the savings from water rationing amounted to 20% of our residential water use, then that equals about 0.5 MAF, which is about 10% of the water used to irrigate alfalfa. The California alfalfa industry makes a total of $860 million worth of alfalfa hay per year. So if you calculate it out, a California resident who wants to spend her fair share of money to solve the water crisis without worrying about cutting back could do it by paying the alfalfa industry $2 to not grow $2 worth of alfalfa, thus saving as much water as if she very carefully rationed her own use.
His conclusion was that it would be much more efficient and cost-effective to pay alfalfa farmers $860 million to not grow alfalfa, since they are the largest crop by water consumption than to try to get consumers to water every galllon
This is the type of “solution” I expect from Alexander. He’s a brilliant thinker and entertaining writer, but his instincts about economics and government action are not always thorough or on the mark.
And while I don’t believe Alexander was completely sold on his own solution, David Friedman (Milton’s son), offers a much more elegant solution in a comment on the blog by simply allowing the price of water to rise and letting people and industry adjust accordingly:
People who imagine that pricing water means the poor going thirsty have a wildly inaccurate picture of water consumption. Almost none of it goes for drinking.
Suppose the price of water increases enough so that nobody grows alfalfa in California. That means that the 5.3 million acre feet currently used for the purpose have increased in price enough to eliminate the profit currently made on revenue of $860 million. Call that an increase of $100 an acre foot, to estimate high… [or about] one cent per 30 gallons.
He continues:
In a previous post, I calculated a very rough figure of a price increase of about .03 cents per gallon to drive out the alfalfa farmers. That’s almost certainly much too high, since if you actually increase the price the result will be to make people economize on water usage in whatever are the least expensive ways, which is unlikely to be by abolishing one crop—call it .01 cent/gallon for a simple back of the envelope guess, I suspect still high.
Then, he brings it all together:
Drinking water is a necessity. As per my earlier posts, the price increase needed to deal with the California shortage would probably be under .01 cents/gallon. Do you think that would result in people dying of thirst?
You might consider that the main purpose of federal agriculture policy ever since the New Deal has been to hold up the price of farm products in order to buy farm votes, hence to increase the cost of food—by a lot more than the equivalent of raising the cost of water by $.0001/gallon.
If you don’t believe my figures, try a price of a penny a gallon, which also wouldn’t result in people dying of thirst. That comes to a bit over $3000/acre foot, or $3 billion/million acre feet, or $14 billion for the amount of water used to grow alfalfa. Compare that to a total alfalfa revenue of $860 million.
Treating water as a necessity on the assumption it is being drunk is a very natural mistake, but in the modern context it’s complete nonsense.
Since water is essential for life, people assume it must be a government monopoly, lest the poor go thirsty. A simple analysis of this situation shows this to be a laughably ridiculous worry. The vast majority of water is used for anything but human consumption. A complete restructuring of water use can be achieved with price changes of a fraction of a penny per gallon, unlikely to affect even the most meager of pocketbooks.
Increase the cost of water almost imperceptibly for the average person and you’ve solved the water crisis.
Published in Economics, General
People already pay for water. To municipalities for consumption. I have (voluntarily) installed low flush toilets and recycle grey water; and due to lower consumption, my water bill went up “to make up for the difference” in revenue by utility companies due to lower consumption.
And just look at bottled water sales.
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lest, right? Just looking out for you for when this thing goes main feed. Great post.
Part of me wonders if we were simply to end all farm subsidies, if these things would all straighten out on their own. I have no doubt that government market interference creates false pricing mechanisms as well as bad incentives (by propping up inefficient and undesired activities over better ones). What I don’t know is how closely that is actually related to water shortages. Obviously, there are environmental factors as well. In California, though, you can pretty much guarantee that it is government-intervention related, regardless the specific cause…
Yes, I saw that, but forgot about it when I went through edits most recently. And thanks!
This is an interesting theoretical argument. In practice, not so much.
Ever tried to bring a bale of alfalfa, or any other crop, into the state of California? They have people with guns at the state border to stop you. Even if you are transporting horses, and have a few bales of hay in your trailer, you have to stop and declare the hay–and the Ag inspectors can seize it.
The Interstate Commerce Clause of the U.S. Constitution applies to all sorts of things–but not, it seems, to anything involving agricultural products or livestock that can spread disease or infestation.
So raising the price of water won’t shift the growing of alfalfa out of California–it will eliminate the growing of that alfalfa, which will essentially wipe out what’s left of the California livestock industry.
That may be okay (people in the eastern U.S. have been eating beef from the midwest for over a hundred years)–but let’s recognize that that’s the consequence of the policy being discussed: the price of water might only go up by 1 cent per gallon; but the cost of any feed-dependent foodstuff (beef, pork, chicken, etc.) will go up significantly.
The other, sometimes ignored, point about the California “drought” is that California has had unseasonably wet climates during the past 80 or so years.
It’s not a drought; this is normal.
The leftoids will call this manbearpig, but I think it’s just the normal climate cycles of the region.
But I suppose “Maybe we shouldn’t do so much water-intensive farming in California” isn’t a politically acceptable statement for the well-connected farmers.
Alfalfa is grown for a reason. Ranchers could bring it in from outside the state (must be weed free), but that raises their cost for raising cattle. Was alfalfa just an example?
[Side note: ground squirrels eat a large portion of alfalfa crops in Northern California. I’ve been crossing the border and doing my part to control their numbers one .22 round at a time. So, in a way, I’m saving water in California]
Better watch out. Over on the Harriet Tubman thread they are trying to do away with that penny!
Absolutely. End all farm subsidies.
“But our food supply is vital. We’ve got to give farms some protection.”
Okay, end all farm subsidies and eliminate taxes on farm income.
Problem solved.
Deregulate the water industry and force environmentalist to pay for the water they use at market rates. Water production and water transportation should be separated. The only difference in a acres of water should be how far the water has to travel and any purifying processes it has to go through for residential use.
However this would overturn thousand of years of water right common law so it is not simple. Let put it this way water has gotten to the point were desalination plants in south California produce water at the same price around 1400 to 1500 an acre.
Just stop diverting the fresh water into the [CoC] ocean! I don’t care about the smelt, trout, or whatever the enviro-freaks think is more important than people’s lives, health, jobs, families. It is high past time people stop letting a vocal minority run rough-shod over the rest of us living in the REAL world (remind you of other groups?) Any ideas on how we accomplish this?
Great post.
To those comments focused on the alfalfa, I’d like to suggest that it was used as an example of how water price increases would likely affect water use. The point is that market responses to price increases will limit the magnitude of those price increases before they get so high as to threaten those uses required to sustain life. I’m reasonably confident that Mr. Friedman understands that the entire brunt of any price increases won’t be born by the alfalfa industry, and that there will be consequences for other markets as well.
I understand (from other comments on that same Slate Star Codex blog post – Scott Alexander truly is magnificent) that alfalfa is also a nitrogen fixer and used as part of a yearly crop cycle that include other, less water-intensive crops which unfortunately do non-trivial damage to the quality of the soil. I am by no means an agronomist, but I do worry about too-easy solutions and the knock-on effects of pulling any one block out of the Jenga tower. Allowing the price of water to rise a tad is probably our best bet (along with investments in additional water storage to help reduce the incentive to pull from easily-depleted aquifers and possibly some desalinization for the southern coastal areas) but I’m not so sure that the elimination of California alfalfa farming will be the end of this debate.
You have reduced the issue to numbers, costs and incentives. This proves you are a bad, heartless person.
What we really need are large-scale state and federal interventions based on principles of kindness and fairness and wonderfulness because while that never actually works, it will make those of us who are not directly affected feel ever so good about ourselves.
Here’s my deal for the environmentalists – we build nuclear power / desalination plants, no more removing dams, and you can keep the rivers flowing. If we can’t increase water production, we will let the rivers run dry.
Current water rates are probably now less than $.01/gallon. So an increase of $.001/gallon, while it sounds small, is at least a 10% bump. Raising water prices by 10% or more will have an economic impact on everything. It won’t convince farmers to just stop planting crops, they will just raise the price of their crops. Allowing the market to set water prices may be the wisest way to allocate water resources, but it won’t solve the current water problem, only more rain will.
Your relative increase is correct, but your figures are off by an order of magnitude. The proper rate increase would probably be under $0.0001/gallon, while current prices are about $0.001/gallon. It makes sense that the increase would need to be on the order of 10% in order to have an effect.
What I don’t follow is why you think farmers can increase prices indiscriminately. At some point someone’s not going to be willing or able to pay. Increasing the price of water would have an immediate effect on use.
The dairy subsidy is based on the the distance from Eau Claire Wisconsin. Remove the subsidy, and ship the from where ever it’s cheapest. As opposed to heaviest subsidy. Otherwise Warren Buffet will start a dairy farm on Mars.
A couple things will allow farmers to pass on rate increases, at least partly, and maintain their current water consumption. One factor is that California is gigantic player in agriculture. It produces close to 15% of alfalfa in the US. So, they have some weight to throw when it comes to setting the market. Secondly, while farmers may not be able to pass on the entire cost of a rate hike, they can find other ways to economize in their production process. In the short term they can’t find ways to use less water or build a more efficient irrigation system, so they may pay workers less or find other ways to cut expenses. Bottom line raising water costs 10% does not mean that farmers will stop growing crops and alleviate the need for water.
Like any business, farmers choose crops (their product line) based on market demand, market price, cost of production, and such. And they optimize the profits for their particular situation.
So if the cost of water goes up, some fraction of the farmers will substitute crops that can be grown with less water. The free market finds the most efficient mix.
But the analysis here seems to projecting that the land would just lie fallow and so no water would be used on it at all. That’s not how it works. Raising prices on water 10% won’t solve the water problem. The price hike required would most certainly be damaging to the economy, just the way a sudden spike in oil prices hurts the economy. I also think that treating water as you would other inputs and just asking the market to settle it is misguided in that water production and supply can’t be raised and lowered according to demand. It also involves the movement of water across huge geographical areas spanning several jurisdictions and different titled lands. So some sort of rationing system overseen by a large cooperative governing body is necessary.
That’s what Alexander suggested, but the analysis by Friedman is the far superior and correct answer. All the land is used for whatever the farmers want to use it for. It doesn’t just affect alfalfa farmers, it affects everyone, and so the costs will be distributed among various crops, which is why the price increase probably will be less than 10%.
Are you simply asserting that the price increase would need to be more than 10% based on your gut, or are you saying no increase in the cost of water will help?
Huh? Why does water supply need to be changed? It is based on the amount of water available. If there’s less, then water will be more expensive. If it gets expensive enough, other sources of freshwater become viable.
Yikes! The takeaway message from this post, that I thought was beyond reproach, was that rationing governing bodies are exactly what we don’t need. It saddens me that you don’t seem to find it convincing.
… or competition. California sounds a lot like old Russia, huh?
But isn’t that part of the point? What California has running is a racket, essentially, and yes they work around things by calling them health concerns, etc… But it is nothing more than economic protectionism. Hadn’t they tried to essentially legislate for the whole country by requiring that all imports comply with their regulations on something like GMO’s or organic products or something of the sort? I believe that didn’t work out for them and it went away, but it has been a while, so I might be remembering wrong.
Regardless, if the alfalfa production stopped and the livestock industry needed hay, suddenly the health and contamination concerns would go away and they’d be demanding the imports. See, the nice thing about government lies is that you can always change them to suit your present needs.
Capital investment required to create ever more efficient water use and to bring other types of fresh water resources to market have to be made with some long term water need in mind. Unfortunately mother nature is too fickle when it comes to water allocation for people to be able to make a bet as to whether they should invest in new hyper-efficient irrigation or desalinization after a temporary spike in the cost of water. Instead they are smarter to rely on historic averages and population/development trends when determining what sort of bet they should make on how to bring more water online.
What’s more, times of severe drought, more severe than now even, can come quickly enough that you cannot rely on the market to adjust fast enough to avoid catastrophic consequences. I’d also like to hear how you suggest navigating the political waters that would need to be navigated when dealing with water rights and fair access that wouldn’t involve something like a water board. This is just more libertarian theory devoid of understanding of how people really behave.
Very well said. I think we should have a group reading and discussion of Henry Hazlitt’s “Economics in One Lesson.” I don’t mean that to be snarky at all; Hazlitt talks a lot about unforeseen consequences of government actions. I think virtually all of us can share in the reactions of some that some things are important and the market shouldn’t just sort them out (like water, for instance), but the big mistake is in thinking that we could sort it out any better. I was just talking about protectionism, and when you combine that with government rationing… to quote mike: “Yikes!”
Becoming more efficient water users has the same effect as more fuel-efficient cars and trucks. As water consumption drops, rates get increased to recover lost revenue. As vehicle get more efficient, less fuel is purchased, reducing the intake of road taxes. Tax increases have been proposed to compensate for this, but fuel prices have dropped from the highs of last summer, thus encouraging more driving. Government puppies chasing not their tails, but ours, I think.
My solution is to give this water to foreigners for free. They’re people too.
see? I can spot the good ones. I should be an editor (kidding, kidding, sheesh!) :)
This is why I don’t worry about the water shortage. Every other resource works this way; if there isn’t enough oil in the world, prices rise, consumption falls, investment increases, and we end up with energy-efficient appliances and fracking.