Living with Water Scarcity

David Zetland just published Living with Water Scarcity.  Ed Dolan at Economonitors reviews the book…(the review is re-posted with permission of the author).

Living with Water Scarcity: A Refreshing Take on a Hot-Button Issue

by  Ed Dolan   (is an economist and educator with a Ph.D. from Yale University. Since 2001, he has taught at several universities in Europe, including Central European University in Budapest, the University of Economics in Prague, and the Stockholm School of Economics in Riga.  During breaks in his teaching career, he worked in Washington, D.C. as an economist for the Antitrust Division of the Department of Justice and as a regulatory analyst for the Interstate Commerce Commission)

Review of David Zetland, Living with Water Scarcity, Aguanomics Press, 2014

Whether it’s cowboys facing off over a muddy water hole in an old Western, or the dirty looks you get if you fill your supermarket basket with bottled water, no one ever denied that people feel strongly about water. David Zetland’s new book, Living with Water Scarcity, explores hot-button water issues in a refreshingly pragmatic way. There are no “-isms,” no blanket condemnations of government or capital. Zetland does care about water—he cares passionately—but he keeps his rhetoric cool while he explains how government water managers have too often failed to do their job while markets, which have worked where they have been tried, need to be used more widely.

The right price

Zetland begins with a simple distinction between scarcity and shortage. Water is scarce in the sense that different people have different purposes for it—drinking, growing crops, sustaining flows to streams and wetlands—but there is not enough to meet all of them all in full. Water is not unique in that regard. We spend our time and money in pursuit of scarce goods every day. We would always like to have more time and money, but we live with what we have.

Shortage is different. A shortage means you can’t get the water you want no matter how much time and money you have. A shortage is a sign of failure to manage scarcity.

For most goods and services, prices are the management tool of choice. For example, we use prices to manage the scarcity of gasoline. The price goes up when there is war in Libya and down when frackers tap new deposits in North Dakota. We haven’t had gasoline shortages since the 1970s, when three successive presidents used price controls to manage votes while attempting (and failing) to manage scarcity with gas lines and odd-even day rules.

Water authorities—at least those that meter water, and not all do—make a stab at managing scarcity with prices. Unfortunately, they don’t always do a good job of it. Consider tap water piped to your home. The cost of that water has three components: The inherent scarcity value of water in your area, the fixed costs of building purification plants and a distribution network, and the variable costs of purification and distribution. There are several different ways that water authorities get things wrong:

  • They often underestimate fixed costs by looking at historical costs of capital rather than replacement costs. The lack of funds for timely replacement leads to deferred maintenance, equipment failures, and supply interruptions.
  • They price on the basis of average rather than marginal costs. For example, a city may get half its water from a well for $1 per unit and half from a desalinization plant for $2 per unit. The well has fixed capacity so all added supply, at the margin, comes from desalinization, yet customers are charged just $1.50 per unit for all their water.
  • The fixed fees they charge for a hookup are too low compared with the variable fees they charge per unit. For example, costs are typically 80 percent fixed and 20 percent variable, but fees may be set so that only 20 percent comes from fixed charges and 80 percent from variable charges. When that happens, although authorities may pay lip service to conservation, in practice they encourage greater water use because that is how they generate revenue.
  • In extreme cases, authorities may undercharge for water, in effect, paying people to use more, and then subsidize conservation measures, in effect paying them to use less. For example, Las Vegas will sell you a swimming pool full of water at the bargain price of $40, and then, to stave off shortages, it will pay you to take out your lawn and replace it with a xeriscape.
  • Worst of all, most water authorities charge nothing at all for the inherent scarcity value of the water. They charge only enough to cover purification and distribution. That would be like setting the price for gasoline to cover the cost of refining and delivery, but charging nothing to reflect the cost of crude oil.

Any one of these practices, let alone all of them in combination, carries the risk of converting water scarcity into water shortage, as Zetland reminds us with a cartoon.

Farmers’ rights

It’s not all about tap water. Farmers use 70 to 80 percent of the water in most countries. Unfortunately, water for farms is typically managed even less well than water for the rest of us. That leads to the book’s strongest policy recommendation: Farmers must buy and sell irrigation water in markets if we are to save communities, maximize food production, and improve water management for household, industrial, recreational, and environmental purposes.

Farmers have water rights, but not always the right kind of rights. In many places, water rights are assigned by first use. Farmers with rights to water from a river or aquifer pay only for the cost of pumping, so they pump until the source runs dry. There is no connection between first use and best use.

To bring rationality to agricultural water rights, Zetland recommends wider use of auctions. His favored form is an all-in auction that puts all water rights into a pool, allows anyone to bid for as many blocs of water at any price they choose, sets the final price to equal supply and demand, and distributes the revenue to those who put their rights in the pool to begin with. That gives outsiders a chance to bid on the water if they have a use for it that may be better than the first use. It also means that anyone can afford to buy back their “own” water even if they have to bid against a billion-dollar corporation. If you put 1,000 units into the pool, no matter how high anyone else bids up the price, the revenue you get from selling the 1,000 units is automatically enough for you to buy 1,000 units. Of course, if the price is high enough, you might prefer to sell the water to someone else rather than buy it back to grow almonds, or hay, or whatever—but that is your choice, not anyone else’s.

Human rights and property rights

People who live in poor countries face the problem of water scarcity just as acutely—often more acutely—than those who live in rich countries. That has led the UN Committee for Economic, Social, and Cultural Rights to declare that governments “must establish that they have taken the necessary and feasible steps toward the realization of the right to water.”

Sadly, this “right” is not always honored. Zetland compared two sets of countries, 17 of them in which the government promised a right to water and another group matched for similar incomes in which no such right was declared. There was no difference between the two groups in terms of actual access to water. He then compared measures of governance quality with water access in 162 countries. There was a strong positive correlation. His conclusion: The issue of water rights in poor countries needs to be framed as one of governance, not one of rights. A human right to water is useless in a corrupt country and redundant in an honest one.

The easiest way to get water to the urban poor, says Zetland, is to let them buy fully priced water from an efficient operator. He cites Phnom Penh as a case in point. In rural areas, he sees property rights as the key. As population grows and climate changes, the traditional individual and communal water rights of the rural poor are too often grabbed by corrupt politicians who pass them on, in exchange for bribes, to cronies, foreign investors, or whomever. What the poor need is a secure registry of water rights that guarantees them a share either of the water itself for their own use or of the revenue from sale to other users.

Resistance to change

Zetland is not just a theorist. He is also a hands-on consultant on water policy. Here is how that has worked out:

I have discussed water pricing and market reforms with urban, agricultural, and environmental interests. Usually they are desperate for a solution. Usually, I offer something that fits their local conditions. And usually they stay with familiar but dysfunctional traditions that feed lawsuits, upset people, and deplete water.

These are some of the leading reasons why water managers resist change:

  • They are risk averse. If they are told markets worked in some other country, they ask whether anyone has tried it in their own. If something has worked in their own country, they ask whether it has been tried in their own state or province. No one wants to go first.
  • Most managers are used to setting a price and supplying every claim, even if that leads to shortage. They either don’t believe that higher prices will cut demand or they see selling to the highest bidder as inherently unfair.
  • Markets encourage transparency, and transparency is a threat to special interests who benefit from lopsided allocations or artificially low prices.
  • Finally, politicians are inherently short-sighted. They prefer the risk of a shortage tomorrow to the risk that reform will cost them votes today.

Water scarcity in the classroom

Let me close with a pitch to those of you who teach economics in the classroom, as David Zetland and I do. Think of this not as a book about water, but as a parable that uses water to tell the larger story of living with scarcity. Every one of its themes has wider applications: How do we get the price right? How do we reconcile the conflicting purposes of people with very different ideas about how best to use  scarce resources? What is the relationship between good government and good economics, and between human rights and property rights? How do we best balance benefits that are enjoyed privately with those that are enjoyed jointly through better communities and a better environment? Living with Water Scarcity packs a lot into its 114 pages. Try it out on your students.

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