Water is too cheap

Timely economics article given the current drought in California.

Such efforts may be more effective than simply exhorting people to conserve. In August, for example, cities and towns in California consumed much less water — 27 billion gallons less —than in August last year.

But the proliferation of limits on water use will not solve the problem because regulations do nothing to address the main driver of the nation’s wanton consumption of water: its price.

“Most water problems are readily addressed with innovation,” said David G. Victor of the University of California, San Diego. “Getting the water price right to signal scarcity is crucially important.”

The signals today are way off. Water is far too cheap across most American cities and towns. But what’s worse is the way the United States quenches the thirst of farmers, who account for 80 percent of the nation’s water consumption and for whom water costs virtually nothing.

Alex Tabarrok points to this passage from the Microeconomics textbook from him and Tyler Cowen:

Farmers use the subsidized water to transform desert into prime agricultural land. But turning a California desert into cropland makes about as much sense as building greenhouses in Alaska! America already has plenty of land on which cotton can be grown cheaply. Spending billions of dollars to dam rivers and transport water hundreds of miles to grow a crop that can be grown more cheaply in Georgia is a waste of resources, a deadweight loss. The water used to grow California cotton, for example, has much higher value producing silicon chips in San Jose or as drinking water in Los Angeles than it does as irrigation water.

Subsidies distort markets by weakening the ability of price signals to allocate scarce resources wisely. People freak out over surge pricing from Uber, but that's trying to do the same thing, in principle.

I extend the idea of subsidies to emotions, too. When someone really gorgeous expresses an idea, I think of that thought as having an aesthetic subsidy. When one grows unusually attached to something that's theirs (the endowment effect), I think of that as an ownership subsidy.

Subsidies disrupt markets, and they have a similar effect on your thinking.