The sky does not charge us for rain, but that water is not free. A homeowner pays for rainwater in the price of the property: If there are two similar residences, and one gets enough rain to sustain the plants, and the other owner has to water the plants at some expense, then the second property will sell for a lower price, as a rational buyer will consider the total cost.

The sky does not charge us for rain, but that water is not free. A homeowner pays for rainwater in the price of the property: If there are two similar residences, and one gets enough rain to sustain the plants, and the other owner has to water the plants at some expense, then the second property will sell for a lower price, as a rational buyer will consider the total cost.

The rent a farmer pays will depend on the other expenses of cultivation, including the cost of water. A sustained drought reduces the rent and land value.

Water is only free if you are in a boat in the ocean or don’t want the water that falls from the sky. Otherwise, water is scarce, and has a market price.

Water is only free if you are in a boat in the ocean or don’t want the water that falls from the sky. Otherwise, water is scarce, and has a market price. Rent is the surplus that remains after expenses for labor and capital goods are paid, and the greater the expense, the less surplus is left as economic rent.

A major global problem is that in many places, the consumption of water is unsustainable. People are using up underground water faster than it can replenish. Some speculators are taking advantage of looming shortages by purchasing water rights.

A major global problem is that in many places, the consumption of water is unsustainable. People are using up underground water faster than it can replenish. Some speculators are taking advantage of looming shortages by purchasing water rights. The article “A Free-Market Plan to Save the American West From Drought” by Abrahm Lustgarten in the March 2016 Atlantic magazine relates how one investor is buying up water rights in the American West.

The drought in the US West has reduced the water supply, but the bad effects of the drought are mainly due to mismanagement. Sustainable water usage requires that the extraction amount equals the increase in the water. It is like living from the interest of an investment without reducing the capital. The same applies to fishing: take only the annual increase, without depleting the stock.

Water usage in the American West has been dominated by historical rights and by governmental laws and public works. President Theodore Roosevelt signed the Reclamation Act of 1901. The government then built dams and canals along the Colorado River and other water ways. Millions of people now depend on that watery infrastructure.

The water folly began in 1922, when seven states served by the Colorado River signed an agreement to divide the water. The planners overestimated the river’s capacity. The shortage is now about 25 percent. With the current drought, instead of reducing the quotas, the governments are drawing down the supply. The structure of government we have today caters to the entrenched interests at the expense of the public and the future, up to the point of disaster. Then, when the water levels such as in Lake Mead will reach alarmingly low levels, there will be emergency rationing.

Much of the water rights in the American West originate in “prior appropriation,” meaning first come, first served, forever. Some 80 percent of the West’s water goes to agriculture, because the farmers were here first. To keep their water rights, farmers need to use up the water, and that creates waste rather than wise use. Any economist can tell you the remedy: Create a market for water, in which those with water rights may sell the water to those who bid the best price.

Much of the water rights in the American West originate in “prior appropriation,” meaning first come, first served, forever. Some 80 percent of the West’s water goes to agriculture, because the farmers were here first. To keep their water rights, farmers need to use up the water, and that creates waste rather than wise use.

Any economist can tell you the remedy: Create a market for water, in which those with water rights may sell the water to those who bid the best price. California has started rationing urban water with quantity restrictions, but in the Southwest, many homeowners in effect still get subsidized water, and use it to water their lawns. The price that many residents and farmers pay is much less than the annualized cost of the infrastructure - the dams, pipes, canals, and pumping.

That water subsidy does not benefit a new buyer of the real estate, because the annual subsidy pumps up the market rent and land value. Instead of paying the full cost of the water, a new buyer pays the previous owner the capitalized value of the cheap water.

That water subsidy does not benefit a new buyer of the real estate, because the annual subsidy pumps up the market rent and land value. Instead of paying the full cost of the water, a new buyer pays the previous owner the capitalized value of the cheap water.

As the Atlantic article points out, “The West would have plenty of water if people used it more wisely.” Australians have been smarter about water than Americans. In response to the drought, Australians implemented a water trading system. Faced with high water costs, users reduced waste. If the US did that, prices based on the social cost of water would then spread to the price of fruits, vegetables, and meat. American meat is subsidized when its feed is subsidized because the water that grows it is subsidized.

Market-based prices bring the response from welfare-statists, “what about the poor? They can’t afford to pay market prices for water.” The answer is to let households buy some amount of water at a low price, and then charge market prices for the rest.

Market-based prices bring the response from welfare-statists, “what about the poor? They can’t afford to pay market prices for water.” The answer is to let households buy some amount of water at a low price, and then charge market prices for the rest. Also, any shift in policy creates persons who suffer a net loss. They can be compensated in order to facilitate a permanent change to sustainable water policies.

The higher price of water would reduce locational land rents, but also generate a higher economic rent for the sellers. If water is sold for 10 cents per gallon, and the cost to the seller is 3 cents, the seller has a gain, an economic rent, of 7 cents. A policy of tapping economic rents for public revenue, replacing taxes on wages and goods, would include tapping the water rent.

The higher price of water would reduce locational land rents, but also generate a higher economic rent for the sellers. If water is sold for 10 cents per gallon, and the cost to the seller is 3 cents, the seller has a gain, an economic rent, of 7 cents. A policy of tapping economic rents for public revenue, replacing taxes on wages and goods, would include tapping the water rent.

Americans think we have a market economy, but in many ways they have a politicized economy. After the El Niño rains of 2015-2016, as the drought resumes, the pressure of water shortages and emergencies will generate quantity rationing, and then maybe people will realize that the price rationing of markets is more efficient, more equitable, and less vulnerable to political pressures.

© Text Copyright Fred Foldvary, Ph.D. rights reserved.
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