Drought == price ceiling enduced surplus demand?

So says newly minted Davis Ag Econ PhD David Zetland:

The real problem is that the price of water in California, as in most of America, has virtually nothing to do with supply and demand. Although water is distributed by public and private monopolies that could easily charge high prices, municipalities and regulators set prices that are as low as possible. Underpriced water sends the wrong signal to the people using it: It tells them not to worry about how much they use.

“But water is a necessity!” you cry? Well, sure people need to drink a couple gallons a day to live, but after that is the back yard pool really a necessity? do people in the desert really need to plant tropical flowers and trees? do golf greens need to be that green?

David’s proposal:

I propose a system where every person gets the first 75 gallons, or 1.5 bathtubs, per day for free but pays $5.60 for each 75 gallons after that. Under my system, the monthly bill for the average household of three would come to $95.

My system is designed to reduce demand rather than cover costs. Revenue paid by guzzlers would cover the costs of those who use only a small amount of water. Any leftover profits could be refunded to consumers or used to enhance the quality or quantity of the water supply.

And there’s even a pretty picture:

5 thoughts on “Drought == price ceiling enduced surplus demand?”

  1. That’s a neat idea. How much water do households use compared to farms and businesses though? How many swimming pools a day does it take to irrigate an almond grove? The golf courses could probably adapt. The rice and walnut farms, probably not so much, and they will fight tooth and nail to keep their current water rights.

    I like this as an interim solution, but I thought you economist guys were against government monopolies and price controls. Wouldn’t it be better to totally deregulate and privatize the water infrastructure?

  2. I dunno, there might be scale issues that makes pure competition pretty untenable. If there’s going to be a monopoly, I want it to be “my” monopoly.

    Anyway, I think farmers would do fine. Either they pass the cost on the rice consumer or they start producing less water intensive crops (which are inefficiently underproduced in the subsidized regime).

  3. Cost passing wouldn’t compensate by itself… they’re competing with other farms in more crop-appropriate climates. A few might survive by re-branding their produce as niche crops. I guess some cost passing would happen anyway where we both dominate those markets and there aren’t good substitutes for those products.

    Switching between really different crops is capital intensive. Not to say that farming, overall, couldn’t make the transition in the very long run. It’s probably just cheaper to lobby, bribe, protest, and run ads about shadowy businessmen (or San Francisco Lawyers! Los Angeles Housing Developers! Fish Loving Hippies!) trying to steal water from wholesome honest farmers. Kind of like your post a few months ago about the price of bitching.

    I’m not saying that irrigation water should be fully subsidized to protect farmers or prop up a market. I’m just speculating on the farmers’ strategic position.

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