Economist’s Corner- Water
Lynn Reaser, Ph.D.
Chief Economist, Point Loma Nazarene University
Indulging in free or cheap water is not an inalienable right. While some might believe that long showers are essential to life, liberty, and the pursuit of happiness, that view is truly a stretch. Water is a good like any other. It is a scarce resource and should be treated as such.
Solving the Problem
Three approaches exist to meet our water challenge: regulation, moral suasion, and pricing. Regulation involves rationing or limiting water consumption by restricting lawn watering, car washing, or other activities either in terms of time of day or amount. Its enforcement is often spotty, frequently putting the onus on neighbors to report violators. This is clearly an inefficient means of reducing water usage. Moral suasion relies on peoples’ belief that they “should do the right thing.” While laudable, results can often by uneven and not enduring. Much of the reduction in water consumption recently experienced in San Diego reflects the impact of the recession. Once recovery resumes, habits may revert largely to their prior ways.
Pricing water to reflect its cost is a simple and straightforward solution. Households and businesses will adjust their behavior and reduce their consumption because it is in their own best interest. No policing is necessary either from neighbors or city officials. Water conservation no longer relies on people searching their social and moral conscience each time they turn on the tap.
Pricing a Scarce Resource
Economics 101 teaches that a good priced too low encourages wasteful consumption and inadequate investment in infrastructure. Water has clearly been priced this way. Is it any surprise that we have a “crisis” developing?
An optimal solution would be to price water at its marginal cost. That would clearly cost buyers of large properties with extensive lawns or agricultural interests dearly since they had made their purchases on very different assumptions. The proposal of setting “base” usage amounts related to property size and number of residents represents a compromise solution. Basic water rates would be applied to those usage rates, with progressively higher rates charged for water consumption exceeding those levels.
These tiered rates would induce major shifts in behavior, with homeowners transitioning to smaller lawns or landscapes more appropriate to San Diego’s indigenous climate. This would be an important step since about half of all domestic water consumption is used for outdoor landscaping. More efficient pricing can prevent a water “crisis.”