Engaging Journeys, Engaged Journalism

Water as Commodity

David Zetland Part 2: Valuing Water as the Good It Is, Not the Good It Was

As discussed previously, economist David Zetland wants us to understand the difference between water scarcity and water shortage. Water scarcity, he says, is a perception. We worry that there may not be enough water to meet our needs, the needs of the environment, and the needs of agriculture and other business. Water shortage, on the other hand, is a fact. In the midst of a shortage there is no water to be had, at any price. Effectively managing water scarcity can prevent water shortages. Failing to manage scarcity will create shortages—an experience already shared by at least some California communities, businesses, farmers, and ranchers.

Zetland’s main point is that water needs to be managed “as the good it is, not the good it was.” Most of our water regulations and rules come from a time when water was abundant—and when public dollars were generously allocated to engineer the delivery of that abundance, via dams, aqueducts, and other infrastructure. Yet the rules that accompanied water abundance are inappropriate in a time of scarcity.

“So we need a new management paradigm in which we identify what type of ‘good’ water is, decide what type of good it should be, and change institutions to move towards our goals.”

This management process has multiple but distinct moving parts. To allocate what economists call “excludable” goods—in this case, water used by individuals or groups in ways that legally exclude others from using it—the tools of economics should suffice, as for any other commodity For non-excludable or community water, which can be used but also overused or abused by anyone, political decision-making is required, so this “social” good can be shared.

Fine-tuning these distinctions further, economists also recognize “rival” goods (in this case, water) that a person can’t use twice, or two or more people can’t use simultaneously, such as the water we drink. (Here’s a “fun fact” from Zetland: “Rival” derives from the Latin adjective rivalis, for a person who shares a river or rivus with another.) Non-rival water would be the lake multiple people might swim in.

What makes allocating water so tricky, Zetland says, is the fact that changing circumstances can transform water from one type of “good” into another—which means management strategies also need to change. Rival water, for example, may be privately held or owned in a common pool. Whether that water would best be managed by economic or political means depends on local institutions: “Reforms won’t work if they ignore past practices and cultural norms.”

Using Price to Prevent Water Shortages

So how should we be managing the scarcity of water as a commodity (excludable good)?

“If water is scarce, raise prices. People will use less water, just as they would use less gasoline,” David Zetland says, noting that higher prices won’t threaten public health and safety. “We know—from studies and intuition—that people cut non-essential uses when prices rise. That is how we know people have plenty of water in the western U.S.: more than half of residential drinking water is sprayed outdoors.”

The rules of scarcity and shortage are the same for water as for other goods, he points out, except for the fact that, unlike most goods, water is not traded in markets that would balance supply and demand through higher or lower price.

Water doesn’t work this way because water regulators require water supply monopolies—which generally pay nothing for the water they distribute—to charge only for their delivery costs. Such “pro-consumer regulation” doesn’t include the value of water or the huge costs, later, of inevitable shortage.

Demand for the gallon of water we each need every day to survive is high, or inelastic. We’ll do almost anything—pay almost anything—to get it. What we’re willing to pay for water beyond that core need, though, is much more elastic. The cheaper that extra water is, the more we’ll use. But when water is scarce we make different decisions, demonstrating the elasticity of that demand. Witness the growing interest of Californians in replacing water-guzzling lawns with native or other low-water vegetation.

For a while we can “supply” our way out of water scarcity—by pumping groundwater, by recycling and purifying “used” water through new technologies, even by desalinating seawater—but that’s no solution if demand continues to increase.

“We can spend money on new supply, but that supply will be overwhelmed by additional demand if consumers do not pay the full cost of delivering their water,” as Zetland puts it.


California has an impressive history of spending more and more public money to increase water supply. The Governor Edmund G. Brown California Aqueduct, named after current Governor Jerry Brown’s dad, is the State Water Project’s largest conveyance. The aqueduct is essentially an open-air canal whose dimensions decrease as delivery needs (water supplies) decrease, traveling south. (photo courtesy the California Department of Water Resources)

The “scarcity value” of water is not included in the price water utilities and irrigation districts charge their customers so—keeping in mind that fresh water supplies are finite—over time the imbalance between supply and demand can only worsen.

Zetland points to the huge (and growing) city of San Diego in arid Southern California as a fairly typical illustration. The city’s aqueducts, more than 50 years old, deliver cheap water from elsewhere. The cost charged to users is just enough to cover delivery (aqueduct construction). Given their relativity cheap water, San Diegans use quite a bit—about 150 gallons per person per day, or double what people in Sydney, Australia use and five times water consumption levels in Amsterdam.

“San Diego’s water managers worry about shortages, but they have not raised prices to lower demand. Instead they look for additional supplies,” Zetland says.

In their continuing pursuit of “more,” about 20 years ago San Diego water managers started buying water from farmers, at a substantially higher price—but customers didn’t feel much pinch because the cost of old and new water was averaged over time. More recently, as scarcity arrived again, water managers decided to build a desalination plant.

The irony is that the extra cost of desalination could have been avoided through conservation, if scarcity costs were included in San Diego water bills. Instead, cheap water continues—because costs are averaged among all supply sources—and the region’s demand for water continues to grow.

“Nobody wants to pay more for anything, but it is better to pay more for something than less for nothing,” as Zetland puts it. “Sometimes we forget that value matters more than price.”

Because most water managers are biased toward seeking new water supplies rather than managing (lowering) demand—the longstanding assumption here in the U.S. and elsewhere being that increasing demand equals increasing wealth—the effects on the environment and on our collective future may well be devastating.

“The most important fact affecting water management across all sectors, worldwide, is the financial cost of raw water: zero. A utility pays a fee for its extraction permit and an irrigation district files paperwork to divert [or pump] water, but neither pays for the volume of water removed from rivers, lakes or underground aquifers.”

To begin to balance this skewed equation, Zetland proposes a “scarcity surcharge” on all water bills that reflects the value of water removed from the environment or “borrowed” from potential future use.

Better yet, we can begin to set prices with the goal of balancing supply and demand. The advantage of focusing on price—rather than subsidized conservation efforts or public education campaigns—is that water users can choose how they will respond to changes in supply.

“Correct pricing,” he says, will stabilize water utility finances, encourage conservation, and prevent shortages.

It will also encourage widespread recycling of “dirty” water, either to substitute for drinking water now used to wash cars and irrigate gardens or as an additional drinking water supply, depending on its purity. Pricing can also deter or pay for water misuse and the environmental degradation it causes.

Getting “Rights” Right

What about water needed for producing our food? Don’t farmers need cheap water to “protect us from foreign food of dubious quality, maintain the rural backbone of our culture, and feed billions”?

No, not really, according to David Zetland. Farmers provide food of appropriate quality to the highest bidder. The business of farming uses 70 to 80 percent of available water in most countries, as in California, so farmers have an immense amount to lose when the water runs out. Given the high stakes it’s easy to understand “why farmers complain when they do not get enough water, why they are increasingly in conflict with cities, environmentalists and each other,” and why, when faced with shortages, they want lax enforcement of rules that “threaten food security.”

Zetland says farmers must buy and sell irrigation water in markets if we want to “save communities, maximize food production, and improve water management in other sectors.”

Allocating agricultural water through markets won’t produce miracles or change the facts regarding water availability, but it will improve the facts—maximizing water’s private, social, and environmental benefits. Not all rural communities will survive, though, let alone thrive. Food won’t be so cheap. And not all agricultural and environmental demands will be met. Some farms—perhaps entire farming regions—will go dry. And some rivers may die.

Zetland’s book discusses three main categories of water rights. (Up the Road will explore California water rights in some depth later.) Yet in this country and elsewhere water rights have evolved to meet changing needs and to accommodate local circumstance.

Take the striking example of the Owens Valley and Mono Lake on the eastern side of California’s Sierra Nevada, where farmers had claimed prior-appropriation rights to water from the Owens River and nearby aquifers. Water engineer William Mulholland of the Los Angeles Department of Water and Power saw the opportunity to greatly expand L.A.’s water supply, to support further growth. The city bought up nearly all the land in the Owens Valley and then executed its right to export prior-appropriation water (water allocated to that land) via the Los Angeles Aqueduct—all perfectly legal.


Viewing the Milky Way from the South Tufa Towers at Mono Lake, site of one of California’s recent water-export battles. (2014 photo by Joe Parks, used through Creative Commons)

Over decades those L.A. water exports depleted local groundwater, drained Owens Lake, and also diverted the local rivers that fed nearby Mono Lake. In 1983, the California Supreme Court ruled that Los Angeles’s water extraction was damaging Mono Lake. Exercising a public trust right to keep more water in the lake, the court weakened Los Angeles’s rights.

The key point, Zetland says, is deciding how much water is available for allocation—which would mean available water after necessary environmental flows are accounted for. Not only have rivers been allocated down to zero, in terms of the environment’s share, some have been over-allocated to the point that many rights will never be delivered.

“Water rights need to be reformed to reflect water flows, consumption, and supply,” he says, predicting that farmers will use less water if they can profit from selling their allocations in markets that reflect local conditions. “Farmers have the most to gain from markets because they have legal or traditional rights to most water.”

Though he generally supports market-based water sales as an effective tool for water allocation, Zetland also believes the community needs to act for the greater good. Given that different members of any community have different opinions about what that “good” may be, just how does he propose that we achieve that?

Next week: Allocating Water for Community

Up the Road Editor Kim Weir holds a degree in Environmental Studies and Analysis and also a Master of Fine Arts in Creative Writing. She has been a journalist for an impressive number of years. A member of the Society of American Travel Writers since 1991, she specializes in California and the West. Weir wrote most of Moon Publications’ original California travel guides, including the best-selling Northern California Handbook.

David Zetland is assistant professor of economics at Leiden University College in Den Haag, the Netherlands. He received his PhD in Agricultural and Resource Economics from UC Davis in 2008. His blog, Aquanomics (that’s a “g,” as in the Spanish word for water, “agua”) and his first book, The End of Abundance, address these and other topics in more detail—and with more citations—than the new book. Yet Living with Water Scarcity, which like Abundance is for sale in both Kindle and paperback editions, is available for free if you’ll be satisfied with the PDF version.

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