19 Jul 2008

Water Markets

RM asks:
  1. How regulated the water markets are right now?
  2. What the chances of good reform are in the near future?
Well, the answers to these questions are all over the board.
  1. First note that hardly any water markets exist. Most water provision is by a local monopoly (state or private), and details of that provision vary. In the US, all residential water quality is regulated for public safety. (Bottled water is often regulated by the USDA, but the regulations tend to be lighter.) Private water providers have their prices regulated by Public [sic] Utilities Commissions; public water providers have their prices set by politicians. In developing countries, there is little regulation, or regulators are another division of corrupt, incompetent government, i.e., bad quality and high prices.
  2. Good reform? Depends on what you mean. At a minimum, reforms take years to implement. (Southern California water prices change annually.) As far as allowing new markets, etc.? That either happens fast (drought and shortage force trading) or not at all. The California Drought Water Bank varies from frantic to comatose.
These are big questions that cannot be answered in any global way. Water tends to be a very local affair -- mostly because water is too expensive (heavy, cheap) to move from one place to another. Unfortunately, the engineering model of water distribution (build pipes, sell at cost) is the "industry standard". If we're lucky, markets for water will work in one place and then spread to others. Diffusion will be slow (water managers are cautious), but at least there will be many opportunities to experiment with markets that meet local needs.

Bottom Line: Water distribution involves local institutions. Learn about yours.


  1. Thanks for the answer. To clarify, I was being a typical American and meant, in the US what are the chances for reform?

    And as far as, what do I mean by reform? I mean, you are out there advising governments to get away from the "water is a human right and so should be priced as low as possible" mentality, and you are citing other economists saying the same thing.

    So, do you think they will slowly come around to your ideas, or do you think you will be saying the same thing on Fox Business in 30 years?

  2. As supplies of water get more stretched (and we're talking the worst in history), the institutions of water management (prices, pub/pvt, size of orgs, etc.) will change in response. I think the economics is there, we just need to get the managers, pols, et al. on board. There will be some leaders on these ideas (water meters, markets, auctions, real-time pricing, etc.) and those ideas will spread -- slowly :(


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