The Economics of Water: Post Abundance

Can the problem of water scarcity be solved by the creation of appropriate incentives? Can the current supply side model be altered to focus on balancing supply and demand, creating a “proper” price for that most essential of fluids?  In a recent thought-provoking discussion, economist David Zetland laid out some proposals that may help to balance efficiency, effectiveness and equity in the market for the world’s water. It is possible that if water were properly priced in a perfect market with perfect knowledge, we would achieve nirvana, or at least an economist’s dream of the perfect market.

Zetland referred frequently to his new book, The End of Abundance: economic solutions to water scarcity, as he spoke at the Hub Bay Area on Monday, July 1; the discussion was co-presented by PresidioWater and The Idea Hive.With no trace of irony, Zetland’s book opens with what, to me, is a startling assertion (in italics):

“This book uses economic tools to tackle the end of abundance and manage the scarcity that results from demand exceeding supply. These tools vary from the familiar (markets and prices) to the subtle (behavioral cues, property rights, and community associations). In all cases, they are meant to decentralize decisions, expand choices for individuals, and improve the way our societies manage water. The tools use economics because scarcity lies at the heart of economic thought and economists have a long history of managing scarcity to produce happy individuals and successful nations.” (Pdf pp. 2-3)

I was unaware of economists’ long history of producing happiness. In a footnote Zetland acknowledges, presumably tongue in cheek, that “Lawyers, anthropologists, sociologists, psychologists, political scientists and others also have good ideas on occasion.” Phew.

Let’s set aside the heroism of economists and focus on his suggestions. Zetland noted that the price of water should reflect its scarcity; now it only reflects the (inexpensive) cost of delivery. For example, water is more expensive in San Francisco, since it is delivered from far away, than it is in parched Las Vegas, where Lake Mead is close to the city. If the price of water reflected its scarcity, then Zetland posits that behavior change (watering lawns, filling pools, etc.) would follow. “We’d consume less water when prices go up in the same way that we consume less gasoline when prices go up.” Recent studies indicate that for gas prices at least, this assumption simply does not hold up. Zetland discusses how he would set water prices here.

Some Shocking Assertions
Zetland is immersed in the minutiae of water management issues, and the detailed arguments in his book bear careful study, but also some critical thinking. Many of his assertions sound good on paper; the dismal science of economics is famous for setting aside inconvenient facts of human behavior, or, say, geographic barriers or greenhouse gas emissions, in favor of models and graphs that predict the interaction of two variables when the rest of the world is controlled for.  He makes some blanket statements that can rush by a bit too quickly but could be questioned, such as, “Food shortages and water shortages are both caused by prices that are too low or policies that block trade from surplus to deficit areas.”

Triple Bottom Nothing
Much of Zetland’s discussion revolved around how to integrate economic incentives into the management of scarce water. At the talk, Zetland noted the primacy of policy over regulating behavior, “If you have good water policies, you don’t have to worry about what people are doing.” This dovetails with his dismissal of Triple Bottom Line thinking, where equal value is placed on benefit to people, profit and planet, as largely ineffective, stating, “If it makes economic sense it should make environmental sense.” While that is quite possibly true in a perfect market with perfect pricing, reality has often required some sort of intervention to ensure that social and environmental benefit is not put on the back burner.

Zetland says that his approaches to water and scarcity will work around the world, but that developing countries have additional issues, such as corruption. In looking at the US political structure, it is tempting to retort that here corruption has simply been institutionalized as influence peddling.

Bottled Water As Different Product
Zetland is highly knowledgeable about the politics of bottled water, from consumer behavior to drink companies’ alleged abuse of local sources. Some activists may be scandalized by Zetland’s dismissal of bottled water as an important focus in coming to a different valuation of water. He minimized the importance of bottled water controversy, saying that its biggest problem is plastic litter, and in this it is not unique, saying that bottled water is a different product with different uses than tap water -the two are not comparable, economically.

Despite a somewhat siloed approach, Zetland’s book has a wealth of clearly explained economic concepts and is a valuable resource for the environmentaly concerned who want to drill down in this area of policy and management. The End of Abundance: economic solutions to water scarcity (in both paper and electronic versions) is available via his blog, aguanomics.com.

 

Photo: 07-18-09 © Anantha Vardhan via iStockphoto