A growing American population coupled with climate change
has begun to constrain the water supply. The Rio Grande is running dry before
it even reaches the Gulf, and cities and states throughout the West are experiencing
droughts. This isn’t to say that there is a shortage of water and that all
global citizens must reduce their consumption before we drink the Earth dry. We
have plenty of water on Earth. It simply isn’t allocated very efficiently.
Market principles just haven’t applied to water. For too
long we have thought of water as a purely public good but now we are realizing
that water is excluded on a first-come first-served basis and, due to our very
developed infrastructure, the only limit on consumption is it’s very, very low
price.
In order to more efficiently allocate our limited amount of
water we must ensure that water is going to its most valuable uses. Normally, a
Coasian solution could determine an efficient allocation. There are well-defined
property rights with water municipal companies owning the right to water, but
there are approximately 300 million bargainers (population of the US) and
transaction costs won’t be cheap.
Alternatively, regulators may choose treat water like air
pollution and enact a cap and trade policy to provide those who value it most a
means to acquire it. However, right now “the allocation of water is certainly
arbitrary” and implementing a new market takes time especially through bureaucracy.
Therefore it may be simpler to employ a progressive price scheme on water usage
as many municipals charge a flat or a regressive rate that encourages overuse.
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