Continuing Education... David Zetland on Water

EconTalk Extra
by Amy Willis
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David Zetland on Water... Lawrence H. White on Monetary ...

We hope you enjoyed this week's episode on the pricing and availability of water with David Zetland. As always, we'd like to hear what you got out of it, and for you to help us continue our conversation.

Have a look at the prompts below and share your response in the comments. We look forward to the interaction.

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1. What arguments does Zetland offer for water conservation beyond aesthetics and the environment, and how does this relate to the issue of pricing water? What is scarcity pricing? How is it similar or dissimilar to road congestion pricing?

Who bears the costs of bad water pricing?2. At the end of the conversation, Roberts asks Zetland what changes might be made to increase water managers' "skin in the game." How does he respond, and how promising do you findhis suggestions? What would Nassim Taleb, who asserts that "skin in the game" is a useful policy tool but also a moral imperative, say about these proposals? If Zetland is right that water pricing does not include all the requisite costs, who would Taleb note as the bearers of those costs?

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COMMENTS (3 to date)
Warren writes:

Zetland’s argument for water conservation is that aquifers are being drained in an unsustainable way. Rivers and lakes are being drained unsustainably.

The earth has a natural carrying capacity, which is determined by area. When one or many populations (of plants, insects or animals) increase beyond this capacity resources are being consumed which will not be replaced by natural means within this era. As resources are reduced the carrying capacity is further reduced. In some parts of the earth water is both relatively scarce and natural replacement is impossible.
The U.S. Agriculture Dept. originally used this term, carrying capacity, with units such as cow-calf. For instance, in Maryland 1 acre of land can support 1 cow-calf unit; in Arizona 30 acres of land can support 1 cow-calf unit.

The term ‘water conservation’ brings to mind different concepts in different geographies. On the U.S. east coast ‘water conservation’ means use as little as possible; don’t take it out of the ground water. On the U.S. west coast ‘water conservation’ means use it all fully and carefully and be sure to return and recycle it. On the east coast unused river and lake water will typically drain through the underlying soil and limestone into the local groundwater and finally into the local aquifer. On the west coast unused river and lake water will often but not always drain through the underlying soil and into local groundwater but in many areas will not drain through the underlying granite into the local aquifer. Therefore such aquifers will never be replenished. The water I drink, in Southern California, has already been through one set of kidneys and will go through another 3 sets of kidneys before exiting into the ocean.

The U.S. is overpopulated when compared with the carrying capacity of its land and therefore we are currently reducing sustainability. In fact the world is overpopulated. To prevent this we need to reduce the human population. Economists, politicians and others generally will not like this conclusion. They want to increase the population in order to increase the money supply so that future increasing populations can live an increasingly better lifestyle. If water is priced slightly above its real carrying-capacity cost/area we can slow the decrease in lifestyle.

Zetland assumes a public agreement that water should be free, or that people and politicians will not want to pay more for water than the barest minimum for their water. Therefore many arguments and much convincing will be necessary to price water fully. Another author suggests creating an open market in water. But this would require water transportation which is very expensive. However If water could be easily and cheaply moved over large distances there may be no need for water conservation at all. There exist areas of the earth that receive truly excessive amounts of rain.

The price of water should include all costs for carrying capacity continuity. This would include the equipment and its replacement and the energy and the watershed protection and the aquifer compensation, (which might be a desalter or a number of desalters for each area along with storage facilities), and all depollution needs.
If we try to retain or reduce the price of water by reducing the usage, then water revenues drop much faster than their costs. That's a huge problem given that water companies have millions, even billions of dollars of debt. So, what you tend to have are water conservation campaigns that are out there to make you feel good, but really they don't want you to use less water because that's going to hit the bond rating. And a lot of water utilities pay a lot more attention to bond rating than they do to other things.

Agriculture uses much more water per acre than does housing, at almost any housing density. We can intensify agriculture, grow more water-conversant crops and reduce water-intensive crops, etc., but that would also considerably reduce our food choices. Do we want more freedom of choice or more population?

Zetland says scarcity pricing on roads or water is not always obviously good. But in general in the case of water, pricing in scarcity would be a good idea. But it does depend on what you do with the money. So that would be part of the question. Right? If you add a price to include the scarcity effect and not just the cost, to include the fact that there are these longer-run environmental impacts, aesthetics, as well as possible crises, you've got to do something productive with the money.

The price of water can’t be raised because people are not going to be able to afford it and they won't take showers, and so on, says Zetland. Or our lifestyle could change. During the WWII and depression people in cities bathed and washed their hair once a week whether they needed to or not. That was the standard. In those parts of southern cities where all the people were black there was often no water supply and those people would have to walk, or drive if they were very lucky, longer distances to obtain water. It was common to complain of their smell, but few non-blacks realized that they simply could not afford water for bathing and often had no soap. Today, comparatively, we use water at tremendous rates and people think it is good, healthy.

Aesthetics may or may not be important to Americans. The English are willing to subsidize farmers as payment for ‘the beautiful country’ in which they can walk or hike on vacations, or merely view from a passing car. The French are willing to subsidize farmers so that they may eat of the best possible food sources. To my knowledge Americans have not yet been willing to pay for aesthetics, but they may be starting to. An example is the slowly growing desire for organic foods, vegetables, fruits, and meats. This is partially a response to the intensification of agriculture (chemical fertilizers, pesticides and GMO’s) which is partially a response to the cost and availability of water by reducing the land area under production.

Does congestion pricing apply to water? Certainly. A road is congested when the number of vehicles exceeds the design capacity. Similarly an area of land is congested when the number of people exceeds the carrying capacity of that area of land. The area could be taxed or penalized based upon the number of people within the area in excess of the carrying capacity. But what would the penalties be used for? Scarcity pricing has supposedly already included the complete costs of supplying all natural water. Congestion pricing might be used to create new water. Not new sources but new water chemically produced.

We are eagerly awaiting our new agricultural water which we are told will be available in 2 years. It’s run off from agricultural and golf course uses and will be carried in new duplicate piping. This opportunity will give us water to use on lawns and trees at half the price of potable water. It will have been primarily treated but not secondarily. The opportunity cost will be $1000 for a second agricultural meter that can connect to a 3 inch water line. Then we have to put In the agricultural water lines on our property. We can’t wait.

David Hurwitz writes:

In addition to the aesthetic and environmental consequences, reducing the baseline water consumption (conservation) would be necessary when demand begins to outstrip supply. This would be particularly true in situations where it is difficult to ramp up supply due to the cost and time delays in augmenting the existing infrastructure, or due to practical limitations in the potential availability of increased supply.

Free, or practically free water provided by governments or regulated monopolies encourages "over-consumption." As evidenced by the experiences in Australia, when the price of water was increased to pay for desalinization plants, consumption went down.

Scarcity pricing would refer to charging for, or increasing the price of an essential good, such as water or roads, in a situation where demand exceeds available supply (at the original price), so that equilibrium could be achieved.

Water scarcity could be due to a combination of reduction in supply due to drought, as well as longer term effects such as population growth. Road congestion could be caused by long term population growth, especially at certain times of the day. In both situations there is a cost of infrastructure--e.g. building roads and aqueducts. With water there is also the availability of the resource to access, while with roads it would be the availability of land.

Warren writes:

That's a good, specific definition of scarcity pricing. And this price would apply to all water sales while the water was scarce.

What about congestion pricing. Would that apply to water only during peak (congestion) times of day, such as is done with traffic? Or would it apply to water at all times whenever the population exceeded the carrying capacity. You could be even more specific and use an hourly average water usage per population when below carrying capacity. Then the charge would be increased when a person used more water in an hour than that average. It would depend upon the meaning of 'congested water'.

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