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.