California's Water Problems

Kevin Williamson has an excellent article in the National  Review on how California is (and how it should be) dealing with it's drought-induced water shortage.

He frames the problem as one that should be familiar to any economist: how do we allocate a scarce resource.  He also makes the point that scarcity is a fact of reality that cannot be wished away or swept under the rug.  

About agriculture, he writes:

Farmers, who by some estimates consume about 80 percent of the water used in California. Agriculture is a relatively small component of California’s large and diverse economy, but California nonetheless accounts for a large share of the nation’s agricultural output. Both of those things are, in a sense, the good news: If market-rate water costs were imposed on California farms, as they should be, then any higher costs could be passed along — not only to consumers, but up and down the supply chain — in a very large global market, where they should be digested more easily

So, how should we allocate water?

There are two possible ways to allocate water in California: The people in Sacramento, Governor Brown prominent among them, can pick and choose who gets what, with all of the political shenanigans, cronyism, inefficiency, and corruption that brings. Or Californians can get their water the same way they get most everything else they need and value: by buying it on the open market. This is an excellent opportunity to apply the cap-and-trade model that many progressives favor when it comes to carbon dioxide emissions, with an important difference: This deals with real, physical scarcity, not artificial scarcity created by regulation.”

More precisely, here's a route forward.

As noted, the water-rights picture is complicated, but it is not so complicated that California could not 1) calculate how much water is available for consumption; 2) subtract preexisting claims; 3) auction off the remainder, with holders of preexisting water rights allowed to enter that market and trade their claims for money. A gallon of water used to green up a lawn in Burbank and a gallon of water used to maintain a golf course in Palm Springs and a gallon of water used to irrigate almonds in Chico would be — and should be — on exactly the same economic and political footing.

To the extent one is worried about the poor being able to afford water, use block rate pricing or take some of the receipts from the sale of water and re-allocate to the poor to let them decide whether it is worth buying.