What is the annual dollar value of water subsidies? I know Jimmy Carter was trying to end water subsidies and the guy who wrote Cadillac Desert [Marc Reisner] said that for every two dollars invested in water subsidies, one dollar of economic value was created. In any event, what is the annual tax payer cost of water subsidies?I can't give an answer to this question, but here are a few thoughts:
- The biggest subsidy to water users is the "opportunity cost" of water they use, i.e., the difference between what they pay (say, $20/af) and what that water is worth to someone else ($50--1,200/af). If you charge them an "unsubsidized, cost of delivery" price of $50/af, they are still subsidized!
- Without a market for water, it's hard to know the value of what's being used. Even if there was a market, we would only know the value "on the margin," which does not capture the (inframarginal) benefits that accrue to users.*
- Timmins (Econometrica, 2002) estimates that water managers in western utilities invest too much in infrastructure, such that they last dollar (of their customers' money) invested only produces $0.45 of benefits. This result is not directly comparable to Reisner, but it indicates the same problem is little bang for the buck.
- The value of water subsidies/rights are often capitalized in the land that those rights are attached to. A farmer who pays $20/af for water may have land worth $5,000/acre while land at a neighboring farm without water is only worth $1,000/acre.
Bottom Line: Subsidies distort prices and therefore distort decisions on actions and allocations of resources. If we want to maximize the value of water, we should end subsidies and distribute water through competitive markets.
* If a $1 can of Coca-Cola is worth $5 to you, your "surplus" is $4; if it costs $0.50 to make/distribute, then total social surplus is $4.50. That may be inframarginal; your 10th can of Coke may only be worth $1.01; there's value, but not that much. Social surplus can ALSO go to zero at the margin when producer costs are rising, unlike my example.
** This PDF (via SH) discusses subsidies on California's State Water Project, pointing out that (urban) MWD has paid 62% of its costs for 31% of its water, while (agricultural) Kern County contractors have paid 13% of costs for 42% of the water. Although MWD should have higher costs (pumping a longer distance, over the Tehacapis) and this is prepared by Public Citizen (a group that sometimes imagines nasties), the report does raise good questions (and give numbers!)