Ronald Bailey wrote an excellent overview of the current water crisis, Water, Water Nowhere?, that identified a major cause of water shortages around the world — the lack of markets for water which tend to lead to gross misallocations of water. Bailey opens his article with a typically absurd example of the way water is price when it is controlled by political systems rather than markets,
One thousand Arkansas rice farms have just about pumped away all their ground water. Naturally, they are looking to taxpayers for relief. Specifically, they are clamoring for the U.S. Army Corps of Engineers, the federal agency responsible for America’s waterways, to spend $200 million on a new system of reservoirs, canals, and pumping stations to divert water to their farms from the nearby White River . . . Resource economist Delworth Gardiner, a professor emeritus at the Brigham Young University, has calculated that the total cost to society of a typical federal irrigation project is $400 per acre-foot of water (and acre-foot is the amount of water it takes to cover one acre to a depth of one foot). The market value of the water ranges from $50 to $100 per acre-foot, but farmers usually pay the Bureau of Reclamation about $20 to $30. If such irrigation projects were evaluated on a true cost-benefit basis, says Gardiner, “there would be no new federal water projects at all.”
But because water allocation is dictated by political rather than market forces, there are numerous such federal water project whose main purpose is to charge taxpayers exorbitant funds to misallocate limited water supplies.
One of the main problems in getting around these existing situation is precisely that the farmers who are on the receiving end of this largesse have political clout that makes simply charging them the true value of the water they use all but impossible. But Bailey offers an interesting way to deal with this while establishing water markets through the back door. Bailey writes,
One ingenious end run around the political problems posed by subsidized water allocation is a “charge-subsidy” scheme that would involve allocating a base property right to a certain amount of water, taking into account its historical use, to individual farmers or groups of farmers. If they used more than their base amount, they would pay market prices for the additional water. If they used less, they could sell the water they saved at market prices to other users, such as cities and industries. This arrangement would strongly encourage water use efficiency and establish water markets between farmers, urban dwellers, and industrial users.
In the case of federal water projects, farmers would receive their initial allocation of water at, say, $20 per acre-foot. If they needed more, they’d pay $100 per acre-foot. If they saved water, they could sell it to city dwellers for $100 per acre-foot. In fact, it might be more profitable for some farmers to stop farming and sell all their water to other users. Such a system would not be perfect, but it would be better than the mess we find ourselves in now.
Such creative solutions are, of course, almost impossible to get past the various interest groups that lobby the government on issues like water allocation, but without some sort of market-based allocation of water, it is going to become more scarce and produce ever more convoluted political systems to allocate it in the face of government-created inefficiencies.
Water, Water Nowhere? Ronald Bailey, Reason, November 13, 2002.