26 Aug 2010

This kinda BS stops water markets

In this paper [pdf] two academics claim that farmers cannot afford to use markets for water because the price required to balance supply and demand would be too high for the farmers to make money.

Besides the basic flaw in this logic (shortages are good for farmers?), there is the other flaw -- that prices would rise to the VALUE of water before quantity demanded fell to equal supply -- so that farmers "lose money."

This is just wrong.

All that's required is that prices rise high enough to choke demand. It's nearly certain that the price will be below value.

In fact, this figure from paper illustrates where price has to go, both to end shortage and cover system costs: somewhere above O&M costs and below value. Yes, the price is way above what they are paying, but that price is WAY too low.

How would they set the price to balance supply and demand? How about All-in-Auctions?

Bottom Line: All academics have biases; some have biases that defy common sense.