Forbes.com has published my view on water pricing. In it, I argue that everyone should get some cheap water and those who want to use more should pay a bundle. Hopefully, this is the first of many public outreach op/eds.
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17 comments:
Mr. Zetland,
You offer an interesting and controversial system to pay for public water in your Forbes commentary about public water in Southern California. I tend to agree, in principal, with your proposed tiers. However, there is quite a difference between folks who live in condos and don't use outdoor irrigation (largest use of water) and homeowners who have outdoor irrigation and pay for it privately. Also, there those that have larger lots vs. smaller lots, etc. What is your proposal to make those tiers fair? Certainly you wouldn't propose that those that can afford to live in larger homes be penalized for owning a larger house and yard. I think you would have to take into consideration the various lot sizes and tier accordingly.
Mr. Zetland, I am a little slow, so please forgive me if I am asking something obvious:
You are proposing to use the price to limit water use. How can that be a market based solution, when you are excluding the largest water users from the equation, the farmers. The prices you proposed would certainly bankrupt all of them, so I think you are proposing that the farmers still get their water for almost free. Why should consumers ration water, rather than the least profitable farmers going out of business?
How can you defend a price difference between farmers and consumers that is higher than the extra cost of purification for drinking water?
@WaterWonk -- I am indeed proposing that people with large lots pay more -- a LOT more -- for the "pleasure" of irrigated lawns. I have two tiers -- the first bit is free, pay through the nose for more than that. All rates are per capita, NOT per sq ft.
@Skallagrimson -- I am only discussing urban water supply. You are right that ag water is the largest share (75-80%) of all water used.
My solution for farmers is that they buy their water on open markets. Given that they already own most rights to water, they could choose to buy their own rights back. (I am not interested in taking farmers water or rights, just allowing farmers to sell their water.)
"How can you defend a price difference between farmers and consumers that is higher than the extra cost of purification for drinking water?" I will not, but a larger difference will persist until farmers and urban users are buying water in the same, wholesale market -- and they are not doing so now.
Congratulations on the Forbes publication. It and your comment responses are well done. And, I hope your time at GMU is enriching.
The abiltiy for farmers to sell the water at rates exceeding the value water intensive crops would bring in leads to all sorts of environmental benifits as well. Your system also encourages the urban [landscape] farmers to face the same cost/benefit tradeoffs....also to the benefit of the environment.
In an enviromental sense a basin import/export cost mechanism would be nice to envision. It could mitigate the lost ecological, or assimilative, value of the water in impacted basins. ie, if conserved water leads to new growth in impacted basins, or allows more to be exported in basin water quality may suffer. Have you given thought to who would be willing to pay for that value? For example would it be water users/ratepayers in the impacted basin who would otherwise have to pay for advanced treatment technologies and increased energy use? Fish/wildlife conservancy groups?? Just thinking how your simple transparant system could cover these issues....or maybe it already does.....
@anon: "if conserved water leads to new growth in impacted basins, or allows more to be exported in basin water quality may suffer."
I am wary of exporting water from basins, but that's an obvious area for the biggest gains from trade. As you point out, it can get out of control (e.g., Owens Valley, the Sac Delta and now the Vegas/Snake Valley scheme). My gut instinct is to put a cap (or sharply increasing price) on total exports.
Great post, well-stated!
Nice! I am especially impressed by your glamor shot. You are the James Dean of environmental economics.
Bob -- Luckily, if I drive my bike into a tree, I'll live :)
Sorry David my kudos were premature. :) I finally read your whole article and I have a quibble with this:
We can solve America's water "shortage" in the same way that we would solve a shortage in any market.
I sincerely hope that we don't solve other shortages by letting David Zetland decide what the marginal pricing rules will be, even if you do draw a nice curve to illustrate. :)
I understand that you can't just say, "Privatize it and let the market price it" because people will think you are nuts. But still, I don't think you should have made it sound as if your solution is how we do things in other markets.
Bob -- in my haste to be clear, I left off "that we would solve a shortage in any market.... by raising prices"
I'm advocating the principle of higher prices. I am the LAST one to say that I know the right price.
Ah, but setting the right price is really the trick, isn't it? If your argument is that higher prices would reduce the quantity of water purchased, than that is uncontroversial. The trouble is that the real market for water, especially potable water, violates so many of the assumptions of classical microeconomics that anything but average cost pricing is an exercise in guesstimation of elasticity. I expect you know that.
The idea of charging higher prices and refunding revenue to customers has merit as a resource conservation policy, and in fact I rather like it and many of your other ideas. But let's be clear: your water rate proposal is not a "market" solution, but a regulatory one. Using the word "market" in a publication like Forbes puts a veneer on the proposal that obscures its real nature.
David, nice piece. While you left it out of Forbes - presumably so you don't get immediately dismissed as a kook - I'm not sure why you haven't mention here where the best answer lies: in the total privatization of urban water markets and opening them up to free competition.
That way, we'll have all kinds of attempts by providers to improve services, including by offering different pricing options, rather than bureaucratized/politicized attempts to set more rational prices and constant and hypocritical jawboning.
@anon: "The trouble is that the real market for water, especially potable water, violates so many of the assumptions of classical microeconomics that anything but average cost pricing is an exercise in guesstimation of elasticity." This sentence makes no sense to me. What does AC pricing have to do with elasticity?
"your water rate proposal is not a "market" solution, but a regulatory one." It's a market solution in the sense that higher prices lead people to use less -- in contrast to the current "please conserve" method that does not work. If a private water provider wanted to maximize service with a limited supply of water, this would be the *market* solution. You need to remember that water supplies are often very inelastic...
@TT -- I like private provision (see today's post), but I am realistic about it NOT happening. My piece is meant to answer a relevant question within a relevant institutional structure NOW, as in this summer.
I also think that public water provision can do as well or better than private provision -- they are both monopolies that can go off track/need community oversight.
"This sentence makes no sense to me. What does AC pricing have to do with elasticity?"
It AC has nothing to do with elasticity. Read my original sentence again.
anon says: "The trouble is that the real market for water, especially potable water, violates so many of the assumptions of classical microeconomics that anything but average cost pricing is an exercise in guesstimation of elasticity."
Please explain the violations, which assumptions and how anything BUT AC depends on elasticity guesses. Are you implying that AC prices means we can ignore (!) elasticity? AC pricing is WHY there is a water shortage...
Marla -- I moved your comment here.
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