Water: Is Mother Nature a Supply Shifter?

I wanted to discuss a topic important to me but also one that was important to all of us living in a drought stricken part of the United States.  I was shocked when I skimmed through the blog titles as far back as 2011 and didn’t find anything posted on this topic.  The economics surrounding the water shortages in the Colorado River basin are far reaching and complicated yet fascinating when you consider just the supply and demand aspects of this issue.

The quantity of water demanded continues to increase with population growth and farming needs, even though new technology has helped to use water more efficiently.  During drought years the quantity demanded is higher than the quantity supplied creating a shortage, regardless of price.  The fact that Mother Nature is the one primary supplier of fresh water and it’s difficult to predict her annual supply; I wonder how this affects the various associated economies.  Although I think dams & reservoirs have been societies way of minimizing shifts in the supply curve, with the sustained drought mother nature has become an unpredictable supply shifter.  It’s the supply side of this relationship I find so intriguing although it appears rather simple.

A conference was held in March 2015 in Park City Utah to discuss how managers of water utilities can maintain a healthy bottom line during these times of shortages.  They’re looking at ways of replacing the supply provided by snowpack while others suggest aggressive pricing and new conservation practices.  They mention using block pricing to help sustainability with less water.  I personally wonder if a peak-load pricing strategy might help. 

I’m interested to hear what others have to say about this topic, especially Dr. Tufte because I’m sure this topic is not new in his world of economics.


Dave Tufte said...

Trey: 82/100 (the sentence "The fact that Mother Nature ..." makes little sense as written; then you mean "society's" or "societies'", but not "societies"; I don't object to capitalizing or not capitalizing Mother Nature, but you can't do both in the same paragraph).

I would modify where Trey wrote "regardless of price" to "regardless of the monetary price charged by water authorities". A big problem across the west is that the monetary price set by the utilities is often far lower than the price that will clear the market.

Unfortunately, people respond to this with platitudes asserting that water should not be cheap because it's a necessity. This is nonsense: that's why it should be expensive. The choice is between 1) water priced so there is no excess demand, and 2) water priced so there is excess demand with allocations made on the basis of command and control and first come first served. A huge disservice is done to the public when the debate is not framed in those terms because it obscures the tradeoffs we're actually asking people to make.

So the above is a little bit of economist-rant that you could get from anyone in the field.

Personally, I love the fact that water is priced too low where I live. I'm not from southern Utah, and it's a dream for me to be able to afford to live in a place like this. I'm glad someone subsidizes my water ... even if I think that's a dumb policy choice. I would be even happier if they subsidized my air conditioning and snow shoveling too. But people would object to that because those aren't necessities. See the problem?

Dave Tufte said...

So Trey also asked about what I thought about this from a policy perspective. And the fact is, I try to be neutral, but some might not view me as neutral on this issue.

The fact is, I have been employed as a paid consultant by groups opposed to building a pipeline to bring water to St. George from Lake Powell.

Having said that, I'm not sure they'd hire me again; they may not have liked the answers they got. Anyway, I didn't shill for them ... I just ran the numbers.

First, a general proposition for Utah. I'm not an attorney, but it seems to me that the law backs the rights of the states downstream to water over the upstream states. There is unclaimed water in our part of the Colorado basin that could be developed for use within our state. Many in Utah assert that if Utah developed that water, and California claimed it later on, that Utah would win in court. This position seems very, very, dubious to me.

Second, the problem with Utah, and all of the southwest, is that we are now on a "glide path" where natural population growth will exhaust developed and undeveloped sources of water within several decades. At that point, some of our descendants will simply be priced out of living in this area. We may not be able to price water reasonably, but we do price homes reasonably, and they will get very expensive when you can't build a new one until you tear an old one down to use its water connections. I'm not against development per se, but we should recognize that tying the support for growing populations to the development of water resources sooner rather than later just brings that time when the region is saturated with as many people as it can handle that much closer. When you put it in those terms, it should be clear that the people who benefit from development of water resources are the current property owners, and the people who are against it ... may not have been born yet. This is a problem because they don't vote.

Third, I don't have a problem with the use of water for conservation, agricultural, residential, or industrial uses. But I do think that our avoidance of using market prices to allocate across those needs has led to a perversion of allocations. For example, the problem in California is not water-related conservation measures, but the fact that those in favor of such conservation are using the command-and-control political system to avoid paying for a result they desire. Hmmm ... I think the colloquial term for getting something without paying for it is "sh*tty". Agriculture suffers from the same problem: grow what you can at the water price that clears the market: growing rice in California, or hay in Utah is dumb. And deciding that California needs a cheese industry that compete with places like Wisconsin is even dumber.

Cam said...

I’m originally from Saint George. I remember dreading droughts, but don’t remember much of people not watering their lawns or gardens. I think it is impressive that the reservoirs have been constructed to be able to support the growing population. Saint George was one of the fastest growing cities in the U.S. for years. The rain holds the supply of water, but man has been able to take over the amount available, or supplied, to some degree. I’m sure the local government has toyed with ideas of how to treat the water shortage that will likely come. I wonder what level of population and demand will trigger the eventual rise in price and other restrictions for water usage in southern Utah.

Dave Tufte said...

Cam 50/50

I wouldn't count on the government (or water districts) having done this at all.

The main driver of water development is population projections from the state. These are weird. They extrapolate current trends (adequately, but maybe not well), and then they just stop. It's like no one is responsible for the idea that if you project, say, 600K in population at some point in the future, that this will be followed by 601K a few months later.

But then there's a self-fulfilling cycle. The population projection justifies the development of the water resource. But often that's funded from surcharges on new subdivisions in which houses need to be built and sold to pay the surcharge. Which results in the population increase. No one has any interest in breaking any of those links.

In answer to your last statement ("I wonder what level of population and demand will trigger the eventual rise in price and other restrictions for water usage in southern Utah."), there's a convergence of data items that probably is not a coincidence. Somehow, the amount of undeveloped water resources within reach of St. George, if completely developed by 2050, is almost a perfect fit for the population projection for, you guessed it, 2050. That population is a tad over 600K (so, yes, the metro area will go out past the airport, and out to Hurricane, and up to Veyo, and so on).

The thing is, once you have 600K, even with no immigration into the area, you're going to have a population increase of about 10K per year. But the water will be completely alloted at that point. So about that many people, on net, will have to move out of St. George every year. It will be like the city of Los Angeles is now.