March 12, 2015--Water is essential to human life and it is the world’s scarcest resource, even though at certain times and in certain places it is the most abundant. Supply and demand are rarely, if ever, in balance. To achieve balance should we be like Don Quixote and joust, filled with strong feeling and visionary zeal—and accomplish little? Or should we act rationally and deliberately, with full awareness of the consequences?
I say the latter—and the key is value pricing.
To move water efficiently and cost-effectively—from one city to another, from one province to another, from one state to another, and across national boundaries—we must first define who controls the resource, whether it be a lake, a river, or an aquifer. Only when ownership is certain can we invest in developing, distributing, and pricing water near or at its marginal value.
We need also to treat the construction and maintenance of canals and pipelines as an economic as well as an engineering problem. Only then will it be possible to price distribution systems so that revenues from them cover their actual costs.
We should also consider inducing movement of consumers closer to the source. How? By pricing water close to marginal value at the point of consumption. Consider that a gallon of bottled water costs about $3.75, $1.10 in bulk, and at retail quantities, more than a gallon of gasoline. The sheer size—$15 billion—and growth of the bottled water industry in the United States tells us a lot about value.
Value pricing will have winners and losers. Free or substantially subsidized water spurred development of the southwest United States; water priced at marginal value will reverse development. Most of southern California, New Mexico, Arizona, and southwest Texas would experience net outward migration of households, industries, and economic institutions if water were properly priced.
To begin pricing water at its marginal value, the first step, and one fraught with difficulty, is to decide unequivocally who owns a given water source and to define quantity by some standard measure (e.g., cubic foot per second, acre feet). Let’s start with an identifiable piece of geography and known source of water and propose options.
The alternative is to merely joust and watch the world wither.
John Beyer, an economist and expert witness with nearly 50 years of experience, has guided Nathan Associates’ application of economics to domestic and international problem solving and conflict resolution as CEO and chairman of the board. His technical work focuses on the impact of structural adjustment, foreign exchange and trade liberalization, and changes in domestic pricing, taxes, and related regulations. He has calculated the impact of tax changes on firms, and the effects of deregulation on air transport, communications, and natural gas, among other industries.