Price Gouging Would Solve California’s Water Crisis

The state of California has persisted under drought for several years. Now, regulators have taken drastic action to combat perceived water waste. From The Los Angeles Times:

Cities throughout California will have to impose mandatory restrictions on outdoor watering under an emergency state rule approved Tuesday.

Saying that it was time to increase conservation in the midst of one of the worst droughts in decades, the State Water Resources Control Board adopted drought regulations that give local agencies the authority to fine those who waste water up to $500 a day.

Many Southern California cities, including Los Angeles, Santa Barbara and Long Beach, already have mandatory restrictions in place.

But most communities across the state are still relying on voluntary conservation, and Californians in general have fallen far short of meeting Gov. Jerry Brown’s January call for a 20% cut in water use.

In fact, statewide urban water usage has increased by 1% over the past three years. Cities have made efforts at “voluntary conservation,” which probably amounts to telling people that there’s a drought. But that hasn’t proven terribly effective.

Madelyn Glickfeld, assistant outreach director of the UCLA Institute of the Environment and Sustainability, told the board that despite the Southland’s conservation strides, residents “don’t get this drought.”

She cited lush lawns and freeway sprinklers spraying next to the electronic Caltrans signs urging water savings.

There’s a better way to handle the situation. Instead of siccing the water police on neighbors for washing their car, California could institute market-based reforms which would effectively ration water without any form of policing at all.

Residents of East Los Angeles can expect to pay between $3 and $4 per 100 cubic meters of water used. If those rates were allowed to reflect actual supply and demand, they would clearly be higher. And if the rates were higher, residents would begin to “get this drought” fairly quickly. Those lush lawns grow because their owners regard them as a higher value than the money paid for irrigation. Guaranteed, there’s a price point at which that priority would shift.

But such a market response would be considered “gouging,” something which pretty much everyone regards as wrong. Yet “gouging” would immediately solve California’s problem by incentivizing consumers to ration their water use. Higher prices would also incentivize entrepreneurs to develop new and better ways to deliver water to consumers. Instead of responding abruptly to arbitrary political mandates, individuals would respond fluidly to the price signals offered in the market. The result would be a nimble response propelled by the rational self-interest of California residents. The crisis, such as it is, would resolve sooner and cause less damage over its duration.

(Today’s Fightin Words podcast is on this topic available here. 16:19 minutes long; 15.74 MB file size. Right click here to download this show to your hard drive. Subscribe through iTunes or RSS feed.)