21 Apr 2009

The Value of Water

JC asks a big question:
Your post on the Water Plan prompts a question...

I know the Water Plan makes an attempt to show where all water (developed and undeveloped) goes. What kind of mountain moving equipment would it take to have it show in some form (preferably economic terms) what we get in return? I know Gleick has done some stuff showing the economic contribution of vineyards, silicon chip manufacturers, etc. My one-pager needs updating. Given the significant resources that DWR puts into the periodic updates of the Water Plan, couldn't they do something similar and more comprehensive?

This is all a part of my abiding belief that no real progress will be made reforming water policy until media, elected officials, and the thinking folks among the general public begin to assimilate some basic facts.

I have moments of great naivete, and this is probably one of them.
Well that's a good question. To get an idea of how hard it is to find out the various values that result from water use, consider how hard it is to find that information on the value-in-use of anther precious liquid: gasoline.

In fact, I dare say that NOBODY has that information.

Now the curious question is "why not?" has a surprisingly easy answer: It doesn't matter. Gasoline is allocated in a market where access is rationed by price. There is no reason to find out the values-in-use, because the lower values-in-use are filtered out by the price filter.

You can see where I am going with this...

If we allocated water in markets, with competitive prices, then it would end up in the highest uses. Since we do not (and we use bureaucratic methods instead), we all have to argue over who "deserves" the water. Egads, what a mess!

Bottom Line: Water "management" is not necessary when water is allocated by prices and markets. Even better, the resulting distribution will be as efficient as possible. (As usual, we can maintain equity by ensuring that everyone gets a human right allocation before using markets to distribute the rest.)


dWj said...

It also sounds to me as though your correspondent is begging to confuse average cost/benefit with marginal cost/benefit. If you do an analysis of a well-functioning market, the total value resulting from the proper use of a production factor should exceed the price times the quantity of that factor; this does not mean that more of the factor should be allocated to that product.

Anonymous said...

Been here before, but it must be said again that the approach to allocating water which directs it to the highest dollars will result in:

1. Cities with water, and a constraint to growth removed.

2. Farms with water for specialty crops, other farms out of business. Return of certain areas of California to semi-native conditions, modified by having native water stripped for export.

3. Environment a solid loser. Instream flows only as supportable by charity, which is a fraction of what unfunded regulation currently does.

I'd take a more nuanced bottom line:

1. Limited markets. Water transferable at market conditions where third-party and environmental impacts are mitigated, and area-of-origin hydrology (human and environmental) reasonably respected.

2. Cities' growth limited by ability to purchase SOME water supplies, and ability to develop their own water - e.g., desal at whatever that costs.

3. Farms continue to get water, according to respect for vested rights to water previously perfected, and with reasonable protections against the depredations of the market power of cities. Public trust value of balanced landscape (keeping ag in the picture) factored in.

4. Environment protected through command-and-control regulation, with a few more "safety valves" built in which relax protection where clearly outweighed by human needs.

David Zetland said...

@dWj -- good point.

@CF -- I agree with your (1)b but have these quibbles with...

(2) Cities should be limited by buying power -- subject to all the constraints: equity allocation of tap water; limit of interbasin trades (ag); and enviro constraints.

(3) Depredations do NOT happen in markets. I'd phase "up" ceilings for exports of water from ag/rural areas. Start @ 10%. We'd have to monitor g/w of course...

(4) Not clear about "valves" since that can be manipulated, but they DO have to exist in some form. I don't think they are necessary S of Delta now...

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