For example, households could be allocated a free or very low cost monthly water allowance and this could be varied by household size. This is in place in some areas already. There could also be a differential cost between residential use and commercial use and also an incremental cost for commercial use.
This would probably be more successful in a water-deprived state like California than the across the board 25% reduction in use just imposed.
The advantage of the 25% cut is that it is universal and so no one can say that their ox is being selected politically to be gored. All oxen just get less of a ration to drink. But as critics have noted it's difficult to enforce and avoidance is likely. Price is much more difficult to avoid, but water is a necessity of life, so a purely market solution with a single price is too regressive.
Some may worry about the distributional effects of a higher price of a necessity. But the revenue from a higher price could be rebated to consumers on a lump-sum basis, making the whole system progressive. We would end up with more efficiency and more equality.This involves political decisions in addition to economic factors, so implementing anything in California will be difficult, given a divisive political climate and the political strength of commercial interests.
This is an increasingly pressing that the whole world is facing and we had better get on it instead of imposing ad hoc solution, i.e., shooting from the hip, after facing an imminent crisis and not having prepared for it. The alternative is lose the use of a lot of land, which will displace a lot of people, which will then result in migration to more resource-rich areas, causing problems there.
This is a supply issue that can't be fixed by just throwing public money at it. Moreover, this is a problem that faces only certain states, and states are budget-constrained since they are currency users. The low hanging fruit in supply problems is efficiency, and with respect to natural resources, conservation and recycling. The opportunity here is private investment in solutions to inefficiencies and public investment and regulation to address relevant externalities.
Greg Mankiw's Blog
California should raise the price of water
Greg Mankiw | professor and chairman of the economics department at Harvard University
Greg Mankiw's Blog
California should raise the price of water
Greg Mankiw | professor and chairman of the economics department at Harvard University
Lets see, we can either enrich the state and country by employing people to build desalination plants and their requisite infrastructure, thereby providing knowledge, work, income, and real benefits....
ReplyDeleteOr
we can impoverish ourselves by restraining water supply, increasing prices and reducing supply, all so that we can save some of our infinite fiat money resources....
We are definitely going to go with the shooting ourselves in the foot solution #2. Such is the embarrassing state of public discourse and understanding.
Pathetic.
When there's not enough water, it should be rationed according to need. A free market rations water according to price, or in other words, to those who can afford it.
ReplyDeleteWater is a necessity on the same level as food. Does Mankiw want to spark a revolution?
@Tom said This involves political decisions in addition to economic factors, so implementing anything in California will be difficult, given a divisive political climate and the political strength of commercial interests.
ReplyDeleteThat's it in a nutshell. People who do not live in the West may find it difficult to understand what a big deal water is out here. In the West, irrigation ditches have more rights than people. Seriously.
In my state water rights are in the constitution -- any major changes over control of water would require a constitutional amendment.
To further complicate things, there is no one governmental body in charge of water. Much of it is regulated by the state, but some of it is Federal, and some of it is local. And then there is the farmer pumping from a well and drawing down the water table who is not regulated by anyone, because the water under his land is considered private property. So implementing Mankiw's water tax isn't really possible without first completely rewriting water laws at every level of government.
80% of California water goes to agriculture. So if you got rid of agriculture, there would be plenty of water for people ..... it's just that they would starve to death. :-)
@Auburn, desalination requires lots of energy, so that is a problem in and of itself. Desalination might be justified for urban use but few ag operations could stay in business if they had to pay the cost of desalinated water.
So the real issue is agriculture. Do we want to continue coddling and subsidizing agriculture? And if we don't, then how do we support our growing population? What happens if there is a major crop failure? Is there a plan for all this stuff, or do we trust the invisible hand of the market to take care of us?
If it weren't for the drought, the current allocation scheme would have worked according to plan.
ReplyDeleteWhat access to water would farmers have if they were not protected from urban demand? A free market in water would be disastrous for agriculture.
If there is a supply side issue in anything and you *can't increase the supply* then a market based solution is a disaster.
ReplyDeleteWhat you need to do is adopt an old 2nd World War trick from Europe - hard rationing.
Dan-
ReplyDeleteIn you case you missed, the amount of energy available to use is practically infinite. wind, solar, nuclear, all it takes is money, we have the technology, raw materials, and manpower already, and all more investment in renewables will do is increase R&D spending and bring prices down further due to economies of scale. Money is the only issue, as usual.
Agree with @Neil about rationing (though it's easier said than done for ag water). Rationing is fair, and unlike market solutions it allows the government to control aggregate consumption.
ReplyDeleteBut then you are moving away from a market economy to a planned economy. That's a huge ideological leap in the conservative U.S..
@Auburn, if I were running things we would definitely be ramping up solar and wind, but it's not infinite, it's not free (remember when they told us nuclear power would be too cheap to meter ????) there are environmental costs at every step of the way, and the burst of activity required to ramp up green energy could actually increase greenhouse emissions in the near term.
What access to water would farmers have if they were not protected from urban demand? A free market in water would be disastrous for agriculture.
ReplyDeleteNot really, The cost of food is being subsidized social though externalities. A basic principle is that that market price should be equal to true cost. Of course that would raise prices and result in supply side inflation what would act as a regressive tax. That would have to be offset by subsidies to the poor rattan the giving the subsidies resulting from externalities to owners of the means of production.
Mankiw implicitly gets this.
In you case you missed, the amount of energy available to use is practically infinite. wind, solar, nuclear, all it takes is money, we have the technology, raw materials, and manpower already, and all more investment in renewables will do is increase R&D spending and bring prices down further due to economies of scale. Money is the only issue, as usual.
ReplyDeleteAgree, but California's problem is today (and the whole West and South West soon) and that takes time and funding to ramp up.
Yes, it's theoretically possible to do quickly if the federal government would fund a Manhattan project to do it as critical to national security and the national interest as a whole, but that's not going to happen anytime soon. Instead, the funds will pile into cost overruns on the F-35.
Oh, and Russia is showing off its new "third generation" tank. We need one tomorrow. Put everything else on hold.
Of course that would raise prices and result in supply side inflation
ReplyDeleteMaybe, maybe not. Depends on who sets the prices.
To the extent that ag commodities are an international commodity with prices set by international markets, then farmers do not set prices and would not be able to pass on their increased costs. Either the costs would come out of the farmer's profits or, worse case, they would go out of business, which might eventually lead to higher prices.
I'm told that there is still a lot of inefficient water usage in Cali ag, i.e., flood irrigation, and growing almonds which is extremely water intensive. Some of the subsidized farmers have never had an incentive to become more water efficient because they don't pay for it.
So in reality if farmers had to pay the market price for water, many would find more efficient ways to irrigate, and at worst they might stop growing certain crops like almonds, which poor people can't afford to buy, anyway.
But then you are moving away from a market economy to a planned economy. That's a huge ideological leap in the conservative U.S..
ReplyDeleteCommand is heresy in the very conservative US West, where the water issue is most severe.
Agriculture can be forced to become more efficient by cutting the amount they are allocated. Rationing 101.
ReplyDeleteThere is no free market in water in California, in the west, and in most jurisdictions. Water property rights and subsidies are not how you create a "free" market.
Mankiw is the heretic, wanting to rearrange deck chairs for no discernible gain. He is going against a longstanding arrangement for which the "conservative west" is quite comfortable with, perhaps because they have more experience in water management.
Not really, The cost of food is being subsidized social though externalities. A basic principle is that that market price should be equal to true cost. Of course that would raise prices and result in supply side inflation what would act as a regressive tax. That would have to be offset by subsidies to the poor rattan the giving the subsidies resulting from externalities to owners of the means of production.
ReplyDeleteMankiw implicitly gets this.
He doesn't get it. The way it stands now, farmers could sell their allocation and leave their fields fallow. Some already do:
http://modernfarmer.com/2015/03/california-farmers-are-selling-water-to-the-state-instead-of-growing-crops/