16 Apr 2015

But what about the POOR people?

AR asks:
A couple days ago the subject of California’s drought came up at work, and as the only economist in the room I of course began talking about how they need to raise the price. While some of my colleagues agreed it made sense for some users (like ag), when I said it would have positive effects in municipalities there was a lot more push back. The reason? The notion that, say, people who really, really valued their lawn would keep watering, which pretty much leads to the idea that poor people will have to pay higher prices because the rich won't conserve.

What do you say when confronted with social equity concerns?
Here's my reply:
That objection comes up a lot, and it tends to result in policies that allow rich to continue to irrigate at low ("pro poor") prices, thereby making the mess worse.*

I always say that increasing the price from $3 to $6/1,000 gallons isn't really going to hurt America's poor (who have cars, mobile phones, etc),** but people won't believe this and -- importantly -- neither will the politicians who can keep their thumbs on prices.

That's why I came up with a "tax and rebate" plan that overcharges heavy users (not the poor) and subsidizes low users. It seems complicated compared to "low prices help poor people," but my idea really does promote conservation while helping the poor (meaning those who use less water per capita).

Remember that most consumption subsidies benefit the rich (=heavy users)

Bottom Line: Price water correctly so systems are maintained and supplies are sustainable. Give income support to poor people.

* Davis is bad, LA is worse.

** I'm not so worried about "free water" in developing countries when the alternative is sickness and poverty, but it's not necessary (see Phnom Penh [pdf]) and certainly counterproductive where governments are corrupt.