Greg Mankiw:
There has been a lot of discussion of the drought in California and the new regulations that the state is putting in place. But there has been little mention of the obvious (to an economist) solution: Raise the price of water.
This would do more than any set of regulations ever could. For example, the governor is not going to force people to replace their old toilets with newer, more water-efficient ones. But a higher price of water would encourage people to do that. A higher price would also give farmers the right incentive to grow the most water-efficient crops. It would induce entrepreneurs to come up with new water-saving technologies. And so on.
Some may worry about the distributional effects of a higher price of a necessity. But the revenue from a higher price could be rebated to consumers on a lump-sum basis, making the whole system progressive. We would end up with more efficiency and more equality.
And here is more from David Zetland:
Even far over here, amidst rainstorms, I am hearing about California's water shortage and the Governor's "order" to reduce use by 25 percent.
Sadly, his orders appear to mix up agricultural (80%) with urban (20%) use, i.e., he talks about lawns and urban prices (two worthy targets!) while "missing" the role of agriculture.
Let me help: farmers use 80 percent of "developed" water... and more if you consider groundwater. Therefore, I suggest that Brown shut down irrigation and pay off farmers [for surface water], so there's more water for cities people. Here are further, useful details.
And this:
In my haste to push for action yesterday, I forgot to elaborate on how to re-allocate water from farmers to cities.
The quickest move is to seize the water -- the property of the People of California -- under eminent domain, but that process would lead to lawsuits.
Given that almond crops produce a profit of $1,500/acre with the consumption of 4 acre feet of water,* it seems reasonable to pay $375/af of water, but let's be generous and say $1,000/af. I'm pretty sure that that offer would probably get so many volunteers that the Gov wouldn't even need to condemn the water.
How would this action undermine California agriculture ("one of the world's great food producers")? I don't know, but I bet that plenty of farmers -- the ones happy to export crops all over the world for profit -- would jump at the huge profits from "farming water."
It's been done before and it will work again.
Those excerpts are full of links so go to Aguanomics for more.
