23 Mar 2009

What's the Right Price of Water?

In the comments to this post, DFB says:
We need to admit that farmers have been paying less for the same amount of water wholesale as cities and other users. That has created a misallocation of resources toward crops that do not make complete economic or water sense. The delta [difference] between the market rate of water and actual price for water also makes some farmers very wealthy at our expense. Sure, we pay less for produce; however most of the crops raised in California are not sold here.
DFB makes two points:
  1. Farmers pay less for the "same" water as urban users.
  2. Such a result may reflect the political desire for cheaper food.
I have responses:
  1. Farmers pay less because their water costs less to deliver, but often they pay less because they have senior (i.e., better) water rights (as I mentioned here).

    Ignoring groundwater (which costs as much as the energy to pump it), we can see the former case with water imported from the Colorado River. PVID farmers who are next to the river pay about $60 to get 9AF of water delivered. (They "use" 5AF, the rest flows back.) For the "same" water, MWDSC pays about $70/AF to move the water to their system, where it is treated for drinking and piped even further. By the time retail customers get it, they are paying $1,300/AF.

    The latter case is much more obvious: Some urban agencies have arrived "late" to the game, and their water costs more because it comes from a more-distant or less-desirable source. The most obvious example is desalination where the water costs $1,200/AF EVEN BEFORE it's pumped through the system. Those agencies buy that water because it's politically easier to build a desal plant than to raise prices ("free" water from a reduction in a demand), trade water, etc.

  2. Cheap food policies do NOT help the poor as much as they help the rich. They do NOT help Californians as much as they help non-Californians. If politicians want to help California's poor buy food, they should not use cheap water. They should charge more for water and then give checks (money saved or subsidies) to poor Californians -- who can then afford to pay "correct" prices for food (the same prices that the rich and non-Californians pay).
Bottom Line: The price of water reflects its source, its cost and the politics of its final users.