The Economics of the California Water Shortage

By Alex Tabarrok of Marginal Revolution

The NY Times has an article on California’s extreme water drought with the usual apocalyptic imagery (see the video especially):

California is facing a punishing fourth year of drought. Temperatures in Southern California soared to record-high levels over the weekend, approaching 100 degrees in some places. Reservoirs are low. Landscapes are parched and blighted with fields of dead or dormant orange trees.

The apocalyptic scenario needs to be leavened with some basic facts.

California has plenty of water…just not enough to satisfy every possible use of water that people can imagine when the price is close to zero. As David Zetland points out in an excellent interview with Russ Roberts, people in San Diego county use around 150 gallons of water a day. Meanwhile in Sydney Australia, with a roughly comparable climate and standard of living, people use about half that amount. Trust me, no one in Sydney is going thirsty.

So how much are people in San Diego paying for their daily use of 150 gallons of water? About 78 cents. As Matt Kahn puts it:

Where in the Constitution does it say that the people of California have the right to pay .5 cents per gallon of water?

 Water is such a small share of most people’s budgets that it could double in price and the effect on income would still be low. Moreover, we don’t even have to increase the price of water for residential or industrial uses. As The Economist points out:

Agriculture accounts for 80% of water consumption in California, for example, but only 2% of economic activity.

What that means is that if agriculture used 12.5% less water we could increase the amount available for every residential and industrial use by 50%–grow those lawns, fill those swimming pools, manufacture those chips!–and the cost would be minimal even if we simply shut down 12.5% of all farms.

Moreover, we don’t have to shut down that many farms, we just have to shut down the least valuable farms and use water more efficiently. If you think water is cheap for San Diego residents it’s much cheaper for farmers. Again from The Economist:

Farmers flood the land to grow rice, alfalfa and other thirsty crops….If water were priced properly, it is a safe bet that they would waste far less of it, and the effects of California’s drought—its worst in recorded history—would not be so severe.

Even today a lot of CA agriculture uses the least efficient flood irrigation system.

According to data from the state Department of Water Resources, 43 percent of California farmland in 2010 used some form of gravity irrigation, an imprecise method that uses relatively large amounts of fresh water and represents a big opportunity for water conservation.

The NYTimes article is worried about farm loss:

“I’m going to fallow two acres of my land immediately,” said Geoffrey C. Galloway, who has a citrus grove on his ranch near Porterville, in the Central Valley. “Depending on how the season goes, we may let another four go.”

…Last year, at least 400,000 acres went unplanted, and farmers reported losses of $2.2 billion, said Mr. Wenger, the head of the farm bureau, who owns a farm in Modesto. “This year we could see easily 50 percent more,” he said. “We are probably going to be looking at well over a million acres.”

California has approximately 25 million acres of farmland. And while our bodily fluids might be precious not every acre of farmland is. A few less acres of farmland producing low value crops in return for a lot more water is a very acceptable tradeoff."