Water. Or: applying the ‘Coase-theorem’ outside Chicago

Not energy but ‘clean water’ might become the largest future economic bottleneck for an ever-growing human population. Will this be solved by introducing ‘markets’, as suggested by neo-liberal ‘Chicago’-economists who state to be inspired by Ronald Coase who, according to them, proved that markets are more efficient at solving properly priced ‘externalities’ than firms or governments? Let’s first analyse what Coase really wrote:

From these considerations it follows that direct governmental regulation will not necessarily give better results than leaving the problem to be solved by the market or the firm. But equally there is no reason why, on occasion, such governmental administrative regulation should not lead to an improvement ineconomic efficiency. This would seem particularly likely when, as is normally the case with the smoke nuisance, a large number of people are involved and in which therefore the costs of handling the problem through the market or the firm may be high.

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And this caveat is, when you think about it, not just about a large number of people. It is also about power, rents, rigged prices, culture, historical circumstances  and a whole bunch of other variables. ‘Water’ is a case in point . For a long time (thousands of years) water management (drainage, irrigation, flood protection, drinking water, pollution) has led communities to establish all kinds of communal institutions (not just governments!) to guarantee socially desirable outcomes. And we’re still learning, like in New Orleans. Markets and prices can indeed play an important role in solving some of the water problems we have. But ill-defined property rights and markets might as well aggravate the problems (I was really flabbergasted when I discovered that many houses in the privatized UK do not have water meters – the government-owned water companies in the Netherlands take great care that even house boats have meters! And let’s not even start about the epic difference in sewer maintenance in the UK and the Netherlands – no Victorian sewer systems behind the Dunes). About the complexity of the situation two lengthy quotes from:

(A) A 1997 article by Mason Gaffney about failures of the Californian water management system and the devastating consequences of efforts to ‘neo-liberalise’ supply and demand without taking al kinds of rents, subsidies and conflicting uses into account.

(B) A recent blogpost on the website of the Worldwatch Institute about some present improvements in Californian water management (which are large and by consistent with the ideas of Gaffney – though some people seem to be compensated for the loss of water use subsidies, something he warns about)

Ad (A):

We can multiply the value of output from limited natural water supplies by allocating them to higher uses. To this end we need a market in raw water, but existing markets work badly, for several reasons. Sellers are undermotivated, absent taxes or debt. Free groundwater subverts the pricing of surface water. Loss of elevation, and damage from effluents, and instream uses are not charged for. Obsolete subsidies abound; obsolete entitlements dominate allocation. Some trades extinguish public rights. Rent-seeking distorts allocation. Needed public agencies have been sub verted by organized land speculators … water, in many areas, has been used as a “yield-cutting substitute”—a term I have had to coin for lack of standard  theoretical treatment of what should be a basic tool of economic analysis.  Water is such a potent substitute for labor and capital that more water often  means lower yields from each acre. The productivity of water is measured,  not in higher yields, but in lower labor and capital costs that raise net rents in spite of loweryields. I am not aware that farm production economists have ever faced up to this phenomenon and its implications … All of this leads to a wonderful corollary: You can tax water withdrawals without hurting the water-based California economy. A simple solution to many of our intractable water problems would be a severance tax on water withdrawals. Legally, if you can regulate it you can tax it. A tax, properly gauged, is an economic price charged by the owner of water (the State of California) for using its scarce property. If the market champions, along with Chicago-School economists and allied “new resource economists,” were more thorough in their support for the price system (and less mistrustfulof the taxing power of legislatures), they would boost this application of basic price theory with all their influence and talent. … Environmentalists see economists as ignoring or trivializing their form of demand for water. Demands for instream uses, recreational uses, fishing, wildlife, saltwater repulsion, amenities, protection against non-point pollution, drainage, abatement of common pests like mosquitoes, public health, aquifer management and protection are often ignored by the economist (Gaffney, 1989). Too many economists are guilty as charged. Economics should deal with how best to meet all human wants, including those listed plus amenities, pure water, sustained resource supply, watershed protection, public health, and conservation. Many water marketeering economists, however, think only of maximizing GNP measured in the old fashioned way developed during World War II for war’s emergency purposes and never revised. Worse yet, some others are totally oriented to property and politics and don’t even follow the market. They write only of sustaining farm land values, disregarding the cost to fish, wildlife, and the taxpayers. The writings of Professors Buchanan and Tullock offer a convenient philosophical basis for such a myopic attitude (Buchanan and Tullock, 1975). Others, however, are developing an environmental and resource economics.

Ad (b):

As world population grows, meeting the demand for clean freshwater can be a serious challenge, especially for arid and semi-arid cities such as Los Angeles and Dubai. According to a report published in Water Policy earlier this year, cities around the world are struggling to access the water they need to support continued growth.

Half of all cities with populations greater than 100,000 are located in water-scarce basins.

According to UN Water, world population is projected to grow from 6.9 billion in 2010 to 8.3 billion in 2030 and to 9.1 billion in 2050. At the same time, urban population will increase by 2.9 billion, to a total of 6.3 billion in 2050, as a result of urban population growth and movement into urban centers. Growth in cities has led to a dramatic increase in urban water use; since 1950, global water use in cities has increased five-fold as a result of increasing domestic and industrial demand.

To meet the growing demand for water, many cities—such as San Antonio, Adelaide, Phoenix, and San Diego—have had to supplement the use of local water resources with significant water imports from major rivers or aquifers. As a result, urban water use has contributed to the depletion of many important freshwater sources, such as the Colorado, Yellow, and Amu Darya rivers, and resulted in significant ecological damage.

In response to increasing water scarcity, some cities are promoting innovation, efficiency, and conservation in water use. For example, the city of San Diego—which is largely dependent on the depleted Colorado River—has taken steps to promote conservative use of local water resources and decrease reliance on imported water by diversifying local water supplies. In San Diego, these measures have included the development of a water recycling system, a desalinization system, urban conservation policy, and, most notably, an urban-rural water conservation partnership in which the city compensates farmers in surrounding areas for implementing agricultural water conservation measures.

According to Water Policy, San Diego’s agricultural conservation partnership is an innovative model worthy of consideration by other cities … San Diego’s model is innovative in that it frees up water for metropolitan consumption by addressing inefficiencies in the region’s most water-intensive sector. According to the San Diego County Water Authority, agricultural conservation measures are expected to provide 37 percent of city water supply by 2020.

Agriculture is also the most water-intensive sector at the global level. According to the UN Food and Agriculture Organization (FAO), irrigation is responsible for about 70 percent of global water use, and a significant amount of water waste. According to the FAO, as much as 60 percent of water withdrawn for irrigation often does not reach the crop. A global reduction in agricultural water consumption of 15 to 20 percent would make more water available than all the water consumed in cities and industries today.

By helping nearby farmers consume less water more efficiently, cities could free up a new source of local water supply, improve the efficiency of water-use in agricultural production, and improve the overall efficiency of crop production. More efficient water use could, in turn, potentially improve the price and reliability of agricultural products, which could benefit farmers and consumers alike