How To Solve the California Water Crisis

The California water crisis is all over the national news, thanks to Gov. Jerry Brown's imposition last week of mandatory cuts in urban water use averaging 25%. This has resulted in a lot of finger-pointing, as people blame their pet peeves.

For example, we're told that, in the middle of a drought, fracking (the controversial new technique for oil and gas extraction) used up 70 million gallons of water last year. But when you do the math, this turns out to be about five millionths of California's water use. Then there's the attack on Nestlé for bottling and selling California's water. You can say, with some justification, that bottled water is a waste of money, plastic, and energy. What you can't say is that it's a waste of water-- I mean, people are drinking it. (OK, Nestlé may be shipping some of it out of state.)

To my surprise, though, a lot of the finger-pointing this time has focused on the real issue: Brown's restrictions apply only to urban water use, but that represents just 20% of California's water use (around 10% to households and 10% to business and industry). The other 80% goes to agriculture. So a 25% reduction in urban use, a pretty drastic reduction, saves about the same amount of water as a 6% reduction in agricultural use.

And the fingers are pointing pretty hard. Ten percent of California's water goes to almond farming-- in other words, as much as goes to all household use. A hundred billion gallons a year goes to alfalfa exported to China.

Here we come to the fork in the road that divides most people from people with some background in economics. The former say, "That's outrageous! Maybe we should ban almond growing in California. Maybe we should make people aware of how much water is going into those almonds they're eating." The latter say, "Boy, the farmers really aren't paying enough for water."

Enter the famous "miracle of the market." We don't need to decide whether growing almonds is worth it, where they should be grown instead,  and what crops, if any, should replace them. We raise the price farmers pay for water, charging them a price comparable to the wholesale price of water in Los Angeles, and let farmers figure that out. Maybe they should continue growing almonds but not alfalfa, or vice versa. Maybe they should raise vegetables. Maybe they should install more efficient irrigation systems. Maybe they should pack it in and move to Palm Springs. In any case, consumers don't have to decide whether or not to feel guilty about eating almonds.

Unfortunately, this particular miracle of the market leaves quite a bit of damage in its wake. Many farmers probably go out of business, and the ones who don't are a lot poorer than they used to be. A lot of people may not like that result, especially the farmers themselves. What then?

Suppose we keep the price of water to farmers where it is, but allow them to wholesale some of their water (or water rights) to the cities. What happens? Clearly the farmers are no worse off; they can always decide not to sell.  But now, for every gallon (or million gallons, or acre-foot) wasted through inefficient irrigation or overly thirsty crops, the farmer loses the opportunity to make serious money. Now farmers have the same incentive to conserve as if they had to pay a higher price, without being impoverished. Maybe they grow almonds, maybe alfalfa, maybe something else, maybe it's off to Palm Springs (which they'll now be able to afford). End of problem.

Of course it's a little trickier than that. To allow farmers to sell their water means untangling the complexities of Western water law, under which, for example, you can lose your right to water if you don't use it, and some farmers have rights that are senior to other farmers'. But most of this is state law, so California could fix it if the pressure gets intense enough. Also, you need a good regulatory system for groundwater, which California is just putting into place; otherwise farmers just pump the aquifers dry and sell the water. But basically, end of problem.

Wait! say the Greens. What about all those huge lawns in Los Angeles? Actually, per capita use in LA has been going down, as people install more low-flow bathroom fixtures, xeriscape their yards, and fill their pools with Pinot Grigio (well, in Beverly Hills). But maybe even with the farmers using less, we still need to cut back on urban use.

So we could go the Jerry Brown route and impose a mandatory cut, making everyone use only 75% as much as they do now. Or... consider this: Suppose we make the first 50% free. Then we triple the price of every gallon thereafter. Now people who use 75% pay the same as they would have with the mandatory cut. But those who feel they've just gotta have more water for their pet beluga whale can do it, at a steep price. And perhaps more important, people have an incentive to conserve below 75% if they can, because it saves them a lot of money. Those people come out ahead financially. In particular, poor people probably come out ahead.

It's remarkable how many problems can be fixed by getting the prices right. Like global warming. But let's not get into that.