California Drought: A Pricing Problem

From David Henderson of EconLog.

"A simple economic truth is that water-price hikes can get the job done without the expense--and the inefficiency--of conservation ads and water police--as well as the discord that can arise when neighbors snitch on and shame each other.

Also, people differ dramatically in their subjective evaluation of goods and services, and water authorities, no matter how smart they are, literally cannot know these evaluations. Who is to say whose water use is more "fair"--that of the gardener who delights in a green, perhaps small, yard or that of the diner who likes guacamole with chips before a steak dinner and a chocolate dessert? An extra day of lawn sprinkling might require no more than a couple of dozen gallons of water. One avocado used in guacamole requires 220 gallons of water to grow. Each pound of beef requires 5,000 gallons. Each ounce of chocolate sauce spread on ice cream requires 178 gallons of water to produce.

These are two key paragraphs from Kathryn Shelton and Richard B. McKenzie, "The California Water Crisis: Policing vs. Pricing?," one of the two Feature Articles for September. In the piece, the authors give a sense of the magnitude of California's drought problem and, as the above two paragraphs suggest, lay out a simple solution: raise water prices.
Another highlight:

How low are water prices? Very! In San Diego and Los Angeles, cities with arid climates in years with "normal" rainfalls (10.34 and 14.93 inches, respectively), the price of water is significantly less than 0.7 cents per gallon (even after rising modestly by 8-10 percent over the past year). San Francisco, which gets almost twice the rainfall of San Diego and close to the average for the state (21 inches a year), has a slightly higher price but still below a penny a gallon. Such low prices hardly send a signal that water is as scarce, or valuable, as the governor says."