Thursday, December 29, 2011

Some Drought Economics

The NY Times recently reviewed two books that go on at length that the U.S Southwest is an unsustainable hellhole that will soon suffer greatly because of climate change and drought.  What is striking about the article is that it never mentions the price of water in Phoenix, Las Vegas or other Southwest cities.  The Econ 101 solution to this real challenge is ignored.  

Here is a quote from the review about one of the books;

"In his hands, it is a sweeping story, encompassing global weather patterns, the mysterious histories and farming practices of the native people whose settlements rose and vanished in the desert, and the firefighters, biologists, anthropologists, water administrators and others who deal with increasing dryness today and seek to plan for an even drier tomorrow.
In interviews in their offices and in the field, they tell him they fear the story will play out — in forest fires, invasions of insects that prey on trees weakened by drought and heat, die-offs of native grasses, and prolonged dryness and thirst. Rains, when they come, will fall less often in the gentle, soaking precipitation Native Americans call “female rain” and instead will be its “male” counterpart — short, sharp downpours that flood the arroyos, erode the canyons and run off before they can do much to recharge underground water supplies already burdened by overuse."
So what is the price of a gallon of water in Phoenix today?  According to this official website, the average Phoenix household consumes 136,000 gallons of water each year and pays $58.5*12 for it. So, this works out to a 1/2 cent per gallon.   May I propose a solution to drought in Phoenix?  Let the price rise to 2 cents a gallon and there won't be any more drought.  Demand will decline as the green grass will go and households will substitute along a variety of margins so that supply and demand are in balance again.
Why did the author of this book review ignore the obvious economics? Perhaps the Climatopolis style optimism that relies on pricing signals and individual choice is a turn off?  Such a "simple solution" doesn't offer enough gloom and doom?  We control our destiny.  There is an interesting political economy question of why water prices aren't rising.  The Phoenix authorities did raise them by 7% on February 2011.  
Scientists should do their core job of investigating the likely consequences of climate change for cities such as Phoenix.  Spread this information and then allow the market to do its thing. Politicians will inhibit climate change adaptation if they don't allow prices to signal scarcity.   Note the teamwork here, the science only matters if we have free markets where prices reflect all available information about new risks and opportunities.    
Too many scientists appear to believe in a magical West Wing government in which a benevolent leader saves the day.  Martin Sheen isn't up to the job and neither is his son Charlie.  Instead, look to the market.


Michael Cunningham said...

Judy Curry reports that Nordhaus and Shellenberger have published a new e-book, Love Your Monsters: Postenvironmentalism and the Anthropocene (Breakthrough Institute, 2011) which says, sensibly, that “A political movement founded on shrinking the human footprint is doomed to fail in a world of seven going on ten billion souls seeking to live energy-rich modern lives.”

Unfortunately, they go on to say that “We must abandon the faith that humankind’s powers can be abdicated in deference to higher ones, whether Nature or the Market.” In an interview with Scientific American, Nordhaus says “Ted: My biggest fear is that outmoded, irrational and self-defeating ideologies about nature and the market will get in the way of humans making the shared investments in technological innovation required to be responsible earth stewards. I worry that slow rates of innovation among renewables and popular fears of nuclear energy will mean continuing high uses of fossil fuels for decades to come.” In the book, accoding to a Salon article, Mark Sagoff “compares the idea of a self-equilibrating natural ecosystem to the market fundamentalist idea of a self-equilibrating free market.”

I pointed out at Climate Etc that markets are very efficient devices for providing and processing information, for organising production and distribution of goods and services so as to allocate resources to their highest valued use and thus maximise community income. Their superiority to central planning and government direction is well attested. Whatever your aims for the future (unless your aim is to destroy market mechanisms), they will be realised most effectively and efficiently by market mechanisms. This is not ideology, it has been proven over thousands of years all over the world.

EHS Director said...

Thanks for sharing... I posted a link to share with EHS Group.

Amazaing that here in the great lakes we pay more than those rates for water even though we hold the largest fresh water reserves.

EVERYONE should have access to clean water... But if we do not price obtaining it logically... No one will.

Dano said...

May I propose a solution to drought in Phoenix? Let the price rise to 2 cents a gallon and there won't be any more drought.

I do agree that we pay way too little for water, but whatever price we pay has effectively zero percent on precipitation patterns on the earth's surface.

Framing it in this way highlights the massive infrastructure needed to maintain a large human population in the desert.



Dano said...

Michael, Matt will tell you (as will anyone else with an econ education) that free markets cannot provision non-rival and non-excludable goods, which is what ecosystem services are.

N & S want a certain portion of the population to remain ignorant of the basic fact that the economy is a wholly-owned subsidiary of the environment.