California considers raising the price of water due to the drought.

    Published: May 21, 2015

    Should California Raise the Price of Water?

    California considers raising the price of water due to the drought.
    As California grapples with severe water shortages, state leadership is mulling controversial ways to reduce consumption. From an economist’s perspective, urban water shortages are generally self-inflicted wounds, resulting from waste and over-use. To curb this trend, many have suggested taxes and price increases, which are expected to persuade residents to use less water.

    Where’s All the Water Going?

    Recently, California Governor Jerry Brown issued an executive order requiring cities to reduce their water use by 25 percent by 2016. To meet this demand, many communities are expected to impose big fines on residents who waste water. In reality, however, residential homes use only a fraction of all fresh water. According to a report by The Hamilton Project, agriculture accounts for over four-fifths of all water consumption in the American West. This figure is so robust, experts estimate that even a 4 percent reduction in livestock and agriculture watering could lead to a 50 percent increase in fresh water available for all industrial, commercial and residential users. Despite this fact, agricultural producers enjoy astonishingly low water rates, sometimes paying ten times less per unit than people in urban areas.

    How Would Taxes Work?

    Economists argue that without price increases, consumers will have no reason to conserve water. Unfortunately, applying price measurements to water is not such an easy proposition. Since water is a fundamental necessity for survival, some have said the government should subsidize the amount of water a person needs to survive and then begin charging for continued use. But this leaves some big questions about how exactly one should go about pricing water used for lawns, swimming pools, and especially agriculture.

    In theory, economists argue farmers would just have to factor water costs into their production models. For example, if producers want to grow water-intensive crops such as rice or almonds, they could, as long as they’re willing to pay the extra taxes. If the extra cost of water threatens the producer’s ability to compete, he or she would have to invest in new water-saving technology or utilize his or her land in another manner. It would be up to the producer, as long as that producer is willing to pay the real cost of using a scarce resource.

    In reality, however, this proposition is fraught with problems. The vast majority of the time, increased food production costs trickle down to consumers, resulting in pricier foods. Also, if increased water prices result in higher production costs, local farmers will have a very difficult time competing with producers from other regions, who will be able to charge much less, thanks to an abundance of cheap water.

    Finding Fair, Long-term Solutions

    While state officials flirt with the concept of water taxes, some communities are looking to ramp up fresh water production by investing in desalinization plants. In the meantime, concerned residents can help reduce the amount of water they use by utilizing these water conservation tactics.