David Zetland, the 'James Dean of Resource Economists', who runs Aguanomics, has made quite a splash with his solution to California's water shortage (and those of other areas): increase prices! See his article on Forbes.com (you will have to watch an ad).
From the article:
I propose a system where every person gets the first 75 gallons, or 1.5 bathtubs, per day for free but pays $5.60 for each 75 gallons after that. Under my system, the monthly bill for the average household of three would come to $95.
My system is designed to reduce demand rather than cover costs. Revenue paid by guzzlers would cover the costs of those who use only a small amount of water. Any leftover profits could be refunded to consumers or used to enhance the quality or quantity of the water supply.
The accompanying graph, from the article, shows David's proposed price versus the current price for Los Angeles water users.
What I like about his approach is that it has true 'lifeline' rates because everyone gets the first 75 gallons free; low-income consumers do not get left out. His proposal affirms the basic human right to water. How many economists do that?
David, Maude Barlow would hug you!
He concludes:
We can solve America's water "shortage" in the same way that we would solve a shortage in any market. Increase prices until the quantity demanded falls to equal supply. This pricing system would ensure that everyone gets a basic allocation of cheap water while forcing guzzlers to pay a high price.
Want to use more water? Pay for it.
And if that is not enough to impress you, he and his tailor appeared on Fox Business News, discussing water pricing and water shortages.
Just in: an interview with David on Business Pundit (thanks, Drea).
I've heard David's next stop is Lou ("Call Me Luis") Dobbs, where Lou will take him to task for discussing the economics of providing bottled water to foreign nationals crossing illegally into the USA from Mexico (notice I did not say 'illegal aliens').
“Six blind elephants will confirm that a human being is flat.” – Unknown
I agree with Zetland's approach, however, it's only part of the issue. How to raise costs for the middle man, the developers, is quite another issue. Houses in California, and around the US, are still being built. If building new homes come with the "real" cost of providing increased water supplies (and fixed costs of piping) then maybe, just maybe, there would be less development in areas of water resource strain. If developers are not required to absorb an upfront cost of further stressing the water supply, there's no incentive to think twice about the resulting encouragement of increased population and inevitable increased water use.
Posted by: Kate | Wednesday, 30 July 2008 at 07:44 AM
If you're interested in more information, please also check out the interview with Zetland I recently posted on Business Pundit. Different content from the Forbes piece, but similar basic (Zetland) ideas.
http://www.businesspundit.com/interview-with-david-zetland/
Posted by: Drea | Thursday, 24 July 2008 at 10:23 AM
I completely agree!
No calls from Hollywood yet. I guess I'll have to keep my day job :)
Posted by: David Zetland | Thursday, 24 July 2008 at 07:22 AM