Despite California’s immediate deluge, the ongoing water problem in much of the West is drought — reduced rainfall, increasing use of water, dry rivers, mandated cuts. In all the stories I keep reading and hearing about the water crisis in the Colorado River basin and elsewhere, two words are absent: markets and prices. Instead the stories are all about conservation planning and allocations by a central authority — central planning for a vital resource. These Arizona farmers have already lost 60 percent of their “access” to water and will soon lose “every last drop.”
This article mentions scarcity. Economists know a lot about scarcity. In fact, we might say that economics is about scarcity. The economic theorist Lionel Robbins wrote, “Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses.” So why aren’t water planners in the West drawing on economic insights? People in the West want more water than is available. Who should decide who gets the water they want? That really is the wrong question. It’s a political question, a central planner’s question. Economics tells us that all goods — land, houses, cars, steak — are scarce; if they were free, we would all want more. We allocate those resources through the price system. Prices convey information. They tell every potential consumer how much it will cost to acquire another unit of the good. They tend — “as if by an invisible hand,” Adam Smith wrote — to direct resources to their most valuable uses. Countries that tried to abolish prices and allocate resources on the basis of “to each according to his needs” found themselves in economic disaster.
If we treated water like other scarce goods, we would charge market prices for it. The introduction of market prices for any previously unpriced good is likely to be unpopular with many people, who now have to pay for something that was previously “free.” It wasn’t really free, of course; it was paid for by other people or by rationing. But market pricing could greatly alleviate the West’s water problems. If the source of the West’s water shortages is climate change, then we should attend to that. But no climate change solution is going to make water plentiful in the West in the next few years. Markets can’t make it more plentiful, but they can make water flow more dynamically and efficiently to the places where it is most needed.
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