Let Prices Flow: Water Needs Markets
by Floy Lilley
Recently by Floy Lilley: Creating the Anthrax Crisis His Career Needed
What’s the highest price that water fetches today?
The highest market price for potable water today is reflected in an art object. The bottle contains water from springs in France, Fiji, and a glacier in Iceland. Oh, and then there's 5 milligrams of 23 K gold dust sprinkled in the water. It’s "Acqua di Cristallo Tributo a Modigliani." It costs $60,000. For us mere mundanes, however, we can still spend a bundle on water. Buy the Evian Facial Mister. Comprised of 1.7 ounces of mineral water, the Facial Mister water prices out at $592 per gallon. Bottled water is the unique case of market-priced water.
In the 1970s you could not find bottled water. But, by 2009, bottled water was a $21 billion business. We spend only $29 billion a year maintaining our entire water system in the United States. Bottled water is the only water product that Americans have routinely priced and marketed. We now happily pay as much as four times the cost of gasoline for potable water that we can have for free from fountains and taps. Of course, economists will tell us factually that bottled water is not the same good. The square Fiji bottle is a sexy statement, and the ubiquitous bottle of water is a fitness and convenience statement. Subjective valuation determines price. A real market in this water product does exist.
Markets for other water products are, meanwhile, mainly nonexistent. We routinely do not pay for most other forms of water. Until recently, water has been viewed and treated as a free good by all Earth’s peoples. As with all free goods, water experiences unlimited demand. But, water cannot meet unlimited demand. Water needs prices in order to signal scarcity and guide demand. Different categories of water need different prices to reflect different preferences of users. Free can no longer be water’s price. The profligate glory days of limitless water everywhere seem over.
As long as the atmosphere has molecules of hydrogen and molecules of oxygen, why should we ever run out of water?
Despite my own misinformation on this chemistry for decades, I have learned that just because oxygen and hydrogen molecules exist, they do not easily join into water molecules to solve all the world’s water shortages. The reaction is not spontaneous. Joining those atoms requires explosions. So, if hydrogen and oxygen molecules are not simply mating up, just what has been the origin of our water? Until rather recently, the prevailing wisdom has been that Earth’s water supply was primarily deposited via comets. A new theory suggests that water was already present at the birth of our planet.
But, it is not known how much water there is on earth. The 71% of the globe covered in water represents a lesser amount, perhaps by ten times, than the total figure. Besides the normal states of liquid, vapor or ice, most water exists in a fourth state locked in rock hundreds of miles deep in Earth’s mantle. Captured there through subduction, it’s released by belching volcanoes. Altogether, our water is all the water Earth has ever had. All life uses and reuses the same water. Some of everything is in our water because water is also the universal solvent. We can now detect pretty much any amount of anything in everything. Yes, every sweet tea can contain some T-rex pee.
It seems to take floods or droughts for water to get our rare attention.
As a nation, we’ve had plenty of both in this one year alone. In the spring of 2011, it was the Missouri River flooding for months. Then, summer ushered in "Drought Spreads Pain From Florida to Arizona" as a standard headline. Not only will there be fewer crops harvested, but entire herds of cattle will have to be sold off because they simply cannot be fed. With the droughts, wildfires scourge more acreage and people resentfully ration. Some regions will face more than mere rationing. Bob Rose with the Lower Colorado River Authority, which covers an area of Central Texas, said that if the drought continues through the winter, they could begin curtailing agricultural use in spring 2012 for the first time in their 77-year history.
Atlanta almost ran out of drinking water in 2008, but the city had not spent any effort over several decades on providing water to its growing population. Atlanta had also not contributed any money initially to the building of the Lake Lanier reservoir, yet demanded water from it when the city needed it. That legal water war between Georgia, Alabama and Florida has raged for twenty years. When all but dried up, Atlanta’s response is to pray for rain. I don’t see that that’s worked all that well for them.
Just 150 miles northwest of Atlanta in the fall of 2007, the small town of Orme, Tennessee, did run completely out of water. Three hours of water each evening was temporarily provided residents by expensively trucking water in. One hundred twenty-eight days later, a real water pipeline restored water. But every member of the community had taken their water completely for granted.
Not unlike Orme paying for trucking water into town, oftentimes the water is free, but the delivery of the water costs dearly. In Georgia, the system a farmer used to get water from the ground ran on diesel fuel. His fuel bill for May and June 2011was an unheard of $88,442.
California’s Imperial Valley is part of the Sonoran Desert. Barely three inches of rain falls annually. Hindsight makes this location less than the obvious choice for a big agricultural county. The Valley continues to expect cheap subsidized water delivery from the Colorado River, regardless of how crazy it is to make a desert a garden, or how over allocated the dwindling water in the Colorado is. The price for farmers there is a flat rate of $19 per acre-foot, or, $19 for 325,851 gallons of water. Average American homes pay $10,592, not $19, for that volume of water delivery. Yet, American homes are not paying market prices for the water, because the water markets do not yet exist. Even at $19 per acre-foot, $19 is not the cost of the water; it is simply the cost to deliver the water. The water is still free. California spends twenty percent of the state’s electricity expense moving or treating water.
What needs to be done to create working markets so communities could expect to have the water they need?
Governments have handled water resources for the past hundred years. Freely ladling it out to friends and favored sectors, politicians have dictated every aspect about water that markets should have been busy shaping in respectful response to water’s growing resource scarcity. It is no mystery that water’s quality and quantity, affordability and availability are still mysteries in 2011. There has been no market to provide information and calculations.
And, no, command economies cannot play at market. There is no third way. Only private property and rule of law can create a viable market; bureaucratic mandates can deliver only shortages, higher costs and poorer quality.
Governmental over allocation of the water resource Lake Mead now threatens Lake Mead’s very existence.
Without a market of solutions, a dictator-type water czar has stepped into the evaporating strip of desert called Las Vegas. Pat Mulroy has been getting her way in many aggressive actions and, so far, has lost only one big one, after she had laid claim to unused water rights in four counties. Mulroy bluntly forced citizens to use less water. Her raised water rates reduced the fixed charge but increased the cost of higher volumes. Her cash for grass was a gentler incentive toward xeriscaping instead of green lawns. She created a regional water power that she runs. And, toward smart water use, she separated types of water into their end uses.
It may seem a small thing, but most of America simply uses their potable drinking water to do all water chores. Water a golf course? Use your drinking water. Erect an impressive fountain? Use your drinking water. In a market fashion, Mulroy saw to it that treated wastewater, not drinking water, went to all the splashy Las Vegas exterior and interior extravagances. Ninety percent of the water used indoors in Las Vegas is now recycled. The city returns hundreds of thousands of acre-feet of treated wastewater back to Lake Mead each year.
Mulroy is not counting on rain or prayer. She is counting on engineering and the fact that she has gotten Las Vegas officials to think differently about water. But, Mulroy needs markets to do all the things she singlehandedly cannot. Markets might capture and divert floodwaters to Nevada. Markets might create new businesses selling catchments and cisterns wherever rain does fall. Markets might result in desalination plants springing up along the coasts. Mulroy considered one of those. Markets might spawn a whole industry of micro-monitors on water usage to pinpoint needed repair of multitudinous leaks in distribution pipelines. Monitoring can become so respected that instead of seeing water flow through a pipeline, users will begin to see dollars flowing.
As capital-based economists know, the cost of water is the cost of the next unit of water. The next unit of water might not even exist if we cannot get smart enough to use our single supply of water well. That’s why a market is needed – to find, secure and deliver the next unit of water to the next demand for water.
July 16, 2011
Floy Lilley [send her mail] is an adjunct faculty member at the Mises Institute. She was formerly with the University of Texas at Austin's Chair of Free Enterprise, and an attorney-at-law in Texas and Florida.
Copyright © 2011 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.