Environmental Economics

Investing in Water

Warning: This one is a little long and a little vague. Feel free to contribute, clarify, contradict.

Lamiadestra asks

Do you know of any interesting research about returns to investing in "water" (in a broad sense: for drinking, producing energy, for watering lands, for home use, for... whatever) around the world? I'd personally find that very interesting.

This question really needs a book-length answer (and even then...), but here's my best blogger shot at it: Let's start with uses (ordered from highest to lowest value):

• drinking water (tap or bottled)
• industrial water (energy or production)
• residential water (existing or new development)
• irrigation water (annual or perennial crops)

And now let's talk about who is making the investment and where they are (matched in most/least wasteful pairs):

• public/private
• collective/individual
• cooperative/corporate
• developed/developing
• wet/dry places

As you can see from these lists, many factors matter. You can also see that I have made a few controversial choices. I am not married to any of these choices, but I made them with specific examples in mind -- and I can easily be wrong.  Please correct or argue with me in the comments. Links to specific examples are particularly welcome!

Now consider the factors affecting "returns" to investing in water:

1. Benefit/cost ratios: For any private investment in water, that ratio is likely to be higher than one. For government investment in water, the ratio is often less than one. (I'll get to that below...)
2. Opportunity costs: This means the cost of uses forgone by using water in a certain way. Water used for irrigation is not available for drinking.
3. Fixed costs (e.g., aqueducts, dams) and externalities (e.g., damage to environment from use or disposal of water -- including discarding water bottles, creating nasty runoff, etc.)
4. Equity and efficiency: Water does have a social/public/moral dimension, so legitimate equity factors (the children!) will trump illegitimate equity factors (the farmers!)

The highest uses (after drinking water, bottled or tap) are probably in manufacturing drugs (legal and illegal) or high-technology equipment (microchips). The lowest uses are almost always the result of government policies: farmers in India who get free electricity for irrigation pumps,  the Libyan "Great Manmade River" (delivering fossil water from under the Sahara for growing wheat), or the recently-discontinued Saudi program of mining fossil water to grow "national wheat" [great post here].

My least-favorite waster, Imperial Irrigation District, gets its own line. [posts]

So, let's get to your main question -- where should one invest in water? It depends (says the many-handed economist) on the property rights, competition, mix of equity and efficiency considerations, etc. In fact, I'd say that the most profitable place to invest in water is where rights are clear and the high-value use is identified. That's why Nestle and Coke are in the bottled water business (Raw materials cost = 0.03 percent of the retail price? Gotta love it.)

Unfortunately, Nestle's investments are not doing very much for the people most in need -- poor people in developing countries -- and governments in those countries are  not doing very much either, copying the mistaken policies that we see in the western US (cheap water to farmers, self-sufficiency in food, etc.), and the poor are left behind.

Bottom Line: Water is essential to life. Unfortunately, investments in water that could improve many people's lives are distorted by unfair, inefficient and downright criminal political mismanagement. (That strong enough for ya?)

Today at Aguanomics: sustainable living (it might work out fine -- if the icecaps don't melt...)

Water Wars

The Economist discusses the dynamics behind them. Cheap arms make it easier to kill over water, global warming is making water more scarce, and population growth is increasing demand. Does that mean wars are more likely? Not necessarily...

The main reason that people are now (or will be) fighting over water is that the institutions for managing water (property rights, prices, trades, etc.) either do not exist or are inadequate for new conditions of scarcity. In the past years of abundant water, there was no need to decide who owned what, how to divide water among others, whether it was necessary to store water, etc. But -- as water becomes more scarce -- these institutions are necessary to avoid fighting over too little supply and too much demand. As I discuss in my dissertation (chapters 3, 4 and 7), institutions for managing water do not just drop into place -- they take effort to design, need to reflect local conditions, will evolve, and create winners and losers.

Bottom Line: Under the status quo of "no rules", water wars are indeed likely. We can avoid them by designing institutions that reflect local conditions, guarantee some level of equity (e.g., per capita water rights), and allow for the efficient distribution of remaining water. I discuss how water markets can accomplish those goals in many prior posts.

Memorial Day Bottom Line*: Clauswitz said that war is politics by other means. As we consider the sacrifices of those who have suffered in war (soldiers and civilians, families, friends and communities), let's also remember and condemn leaders who have abused their power in waging war. Wars over water are between one group claiming a right to keep what another claims a right to use, and water wars often arise from the same leadership failures. As usual, it only takes one idiot to start a war, but he often finds another idiot to fight with. And the innocent suffer.

Today at Aguanomics: Posts on WaterAid (development, institutions, water) and Black Market Oil (Drivers get an 89% subsidy now; so raise the gas tax to $4.50/gal)

* Yeah, it's serious, and yeah, it's politics, but we should think heavy thoughts on Memorial Day. The Fallen deserve gravitas.

Greetings Everyone!

Hi Folks,

I'm very happy that John asked me to guest blog this week. (Thanks John! Hi Tim!)

I want to say a few things about myself so that you know where I am coming from.

1. I just finished a PhD at UC Davis. My dissertation is an institutional case study of the largest water utility in the country -- the Metropolitan Water District of Southern California. It's a story of evolution, path-dependency, scarcity and mismanagement.
2. I went to grad school to study development economics but ended up in natural resource economics. This background may explain my interest in topics that combine public/private, economic/political, and moral/corrupt themes. Although I came in as a market fundamentalist and fan of efficiency, I have a strong respect for equitable outcomes.
3. I call things stupid when I don't like them. I don't often post on cool stuff because I am busy with the stupid things such as the farm bill, ethanol, the Salton Sea, destruction of the salmon fisheries, bottled water, and development in environmentally sensitive areas. I have more nuanced positions on desalination, carbon taxes, water pricing, and global warming.
4. My postdoc (Wantrup Fellow @ UC Berkeley) is on the political economy of natural resources. I am planning to spend a lot of time on water markets (design, testing and implementation). I'll be working with Michael Hanemann.
5. Right now, I am in DC to work on corruption and regulation, water and development at the Mercatus Center.
6. I'm a born and bred Californian, so you're going to hear some westside perspectives on peace, love, war -- and water :)

So, with that said, please feel free to send me any comments, questions, challenges or annoyances that you'd like me to discuss. (Hopefully I am not the annoyance!) Although I'll be adding to my blog (aguanomics) this week, I'll save my best (?) stuff for here -- and I'll answer every query.

Cheers!

Guest blogger: David Zetland

Let's see, I fly to DC Tuesday for two nights and get back late Thursday. On Friday I drive to Kentucky for four nights. Let's see, this is a good week for a guest blogger!

Please welcome David Zetland from Aguanomics, our first official guest substitute blogger, for the week of May 26-May 30. His first post should hit at any time now.

David is one of the newest PhDs in Aggie and Resource Economics from UC Davis. He is currently doing time at the Mercatus Center as a visiting fellow and will soon start a post-doc at UC Berkeley.

Welcome David, and thanks!

Please give him all of the lack of respect that you typically give Tim Haab.

Gas prices are too low

Robert Frank explains why gas taxes are too low:

The production and consumption of many other goods, however, generate costs or benefits that fall on people besides buyers and sellers. Producing an extra gallon of gasoline, for example, generates not just additional costs to producers, but also pollution costs that fall on others. As before, market forces cause production to expand until the seller’s direct cost for the last unit sold is exactly the value of that unit to the buyer. But because each gallon of gasoline also generates external pollution costs, the total cost of that last gallon produced is higher than its value to consumers.

The upshot is that gasoline consumption is inefficiently high. Suppose that pollution costs are $2 for the last gallon consumed, but that its $4 price at the pump is just enough to cover its direct production costs. Reducing production and consumption by a gallon would then cause consumers to lose fuel that they value at $4, which would be exactly offset by the $4 in reduced production costs. The $2 in reduced pollution costs would thus be a net gain for society.

That simple example captures the classic breakdown in the invisible hand when a product’s market price doesn’t reflect all its relevant social costs and benefits. In such cases, the simplest solution is to discourage consumption by taxing it.

A classic conflict

The season's first American oystercatchers hatched on a fenced-off stretch of the Cape Hatteras National Seashore just before Memorial Day weekend, when thousands of sportsmen flock to the Outer Banks to fish.

Where there is competition across the street

The cost of gas, how two stations set their prices:

... in the quaint south-central Pennsylvania river town of Marietta, Kelly Bosley spends more time worrying about the coffee bar and sandwich counter than gasoline sales at the Rutter's Farm Store she manages.

Unless the Sheetz gas station across the street changes its prices. When Sheetz raises its prices above Rutter's, Bosley's pumps are often suddenly swamped. When Sheetz drops its prices, Bosley's pumps empty just as abruptly.

Climate change might cost 3.6% of annual GDP by 2100

Natural Resources Defense Council press release:

A report [PDF] released today by researchers at Tufts University, commissioned by the Natural Resources Defense Council (NRDC), presents two ways of estimating the costs of inaction on climate change, both leading to staggering bottom lines. A comprehensive estimate, based on state-of-the-art computer modeling, finds that doing nothing on global warming will cost the United States economy more than 3.6 percent of GDP - or $3.8 trillion annually (in today’s dollars) - by 2100. On the other hand, a detailed, bottom-up analysis finds that just four categories of global warming impacts -- hurricane damage, real estate losses, increased energy costs and water costs -- will add up to a price tag of 1.8 percent of U.S. GDP, or almost $1.9 trillion annually (in today’s dollars) by 2100.

But aren't the hurricane damages, almost 25% of the total impacts listed here by 2100, the most uncertain of the negative impacts of climate change?

Hat tip: Daily Grist.

This one looks interesting ...

... but my Library doesn't have electronic access to it. So, what do I do? Interlibrary loan? Nah (too much trouble). E-mail the authors for a copy? Nah (too much trouble). Ignore a potentially interesting paper? Yes. And we call it the information age?*

Joseph M. Little; Robert P. Berrens, The Southwestern Market for Big-Game Hunting Permits and Services: A Hedonic Pricing Analysis, Human Dimensions of Wildlife 13(3):143-157, May 2008.

Individuals pursuing big-game hunting in the Southwestern United States are presented with a wide array of opportunities, including public lotteries and market-based allocations (e.g., auctions, private transactions). The marketing of big-game hunts and associated services by landowners, guides, and outfitters is increasingly common and supported by state-sanctioned, transferable permit allocations. Given the range of permit and services combinations now available in the market, prices can be expected to vary systematically across attributes of the hunt transaction. Using a sample (n = 942) collected from information posted online and a follow-up telephone survey, this research employed hedonic pricing analysis to examine the regional market for big-game permits and associated hunting services in the Southwest. Estimation results allowed the implicit price of different attributes to be identified. Results also have policy relevance, including: understanding trends in ranch prices, assessing poaching losses, and evaluating the revenue generation of public entities in the regional market.

Update: Or, have the PDF delivered to your gmail inbox in a wonderful showing of pity!

$4 gas on the midwestern / southern border

From Wednesday's C-J:

Gas prices shot to $4 across the Louisville* area today, jumping from yesterday's average of $3.83.

Drivers posting prices today at courier-journal.com/gas reported gas in the mid-$3.80 range earlier today, but by noon Speedway was charging $4 at its outlets across the area.

The jump came after the government reported this morning that supplies of crude oil and gasoline fell unexpectedly last week. The report sent oil to a record above $133 in New York trading.

I'll see for myself as I drive there a week from today.

*Note: The most midwestern southern city. Aka, the most southern midwestern city.