I Shall Be Free

July 19, 2005 | 25 comments
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I got my bill today and it turns out that there really is something cheaper than a Germanist these days.

My water bill for July reports that I consumed (not personally) 6100 cubic feet of water. This, to me, sounds like a tremendous amount of water. One cubic foot of water sounds like a lot, actually, were it to be dumped on one’s head. A hundred cubic feet of water would probably be hard for me to haul home from the store in our ten year old minivan and there is no way we could transport it in my little four door compact I drive to work.

And how much was I charged per hundred cubic feet of thie blessed, potable, stuff? 30 cents. 30 miserable cents— less than a Snickers bar. Less than a stamp. So my total water bill came to $20 in user fees plus a $10 fixed payment for the honor of being a customer. Let us all now make collective guesses why there might be the occasional water shortage in Utah or other western states. Perhaps because the price of water is a fifth (or so) what it should be?

Instead of wasting money on public service announcements, we could raise money and solve the water shortage by increasing the price of water. Water conservation would skyrocket! People would be stampeding for the latest gadgets in water waste reduction! Lawns would be replaced with lovingly cared for desert shrubs!

But what, you might ask, about the poor? How can they afford these higher water prices? After all, they have to have water, right? Well, that couldn’t be simpler. If we raise the marginal price of water, we could well afford to A) give away a few hundred cubic feet a month to every household to help those who just need water for basic needs and B) lower property taxes or C) lower the sales tax which is regressive anyway. And that fixed $10 fee, which is also a regressive tax, could be chucked. It would be very easy to make the marginal price of water rise while lowering the expenses of the poorest.

On the other hand, the farmers, sugar beet and otherwise, would be out of luck. One could keep on giving them the sweetheart pricing deal, but since they consume 90% of the water in the state you probably want to change their behavior to meaningfully affect water use. That would be ok with me. There are better ways to spend money than paying people to waste water.

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25 Responses to I Shall Be Free

  1. Sam Payne on July 19, 2005 at 6:16 pm

    Ah Frank, this sounds like my other favorite BYU econ professor Kearl. “there is no parking shortage on campus. Just raise the price to $400 per semester and there will be plenty of open spots.”

    I agree that residential and business water prices should be significantly higher. Think of how much water the Bellagio wastes down in Vegas, and all those stupid golf courses (not that golf is stupid, I don’t want to start a war. but the MILLIONS of gallons used on them is a poor use of a finite resource). Businesses and homes should consume much less.

    Write it up Frank! send it to the capital.

  2. Jim F. on July 19, 2005 at 6:45 pm

    Frank, you might want to check to see whether you have a leak in your system.

  3. Frank McIntyre on July 19, 2005 at 6:58 pm

    Why? How much are you using?

    I am certainly willing to believe I have a leak but I do have a reasonable amount of grass and my wife has been doing a lot of watering as her various plantings get underway. So I can believe we are using quite a bit of water.

    This is not to mention the large sandpit with a water hose right next to it where my son and daughter amuse themselves for hours at a time. I bet they’ve cost us $2 in water!

  4. John David Payne on July 19, 2005 at 11:34 pm

    Sam?

  5. Liesl Buskirk on July 20, 2005 at 12:01 am

    Frank, we used 3800 cubic feet (then again, our lawn is a little on the brown side).

    I totally agree. As we were trying to plan the landscape for our new house, we talked to all sorts of landscape professionals trying to find some we trusted with our relatively big project. Without exception they gave us disbelieving looks when we asked about ideas for a water-wise landscape or incorporating some xeriscape elements into our plan. As it turned out, we love our grassy yard, but feel pretty guilty having a sea of green turf in the middle of a desert. We expected to take a MUCH bigger hit in water costs with the addition of a lawn/sprinkler system and were very surprised at how little it affected our water bill. It’s no wonder nobody takes consevation and xeriscaping seriously. People don’t even bother to turn off their sprinklers on rainy days — it’s not worth the 50 cents to have to mess with the timers . . .

  6. Aimee Roo on July 20, 2005 at 12:58 am

    I don’t agree with raising the price of water, gas prices are sky high and people continue to drive huge SUV’s and trucks, they don’t car pool or even try to walk or bike to close places. Raising the prices does nothing to help cut usage.

    I do think that we need to raise awareness and show how we can conserve water and still have a nice yard. Most people don’t even know what a grey water system is, or what it means to xeriscape, or that there are even alternatives to grass for lawns. We xeriscaped a good portion of our yard, and if we had built new we would have installed a grey water system for our yard watering needs. There are a ton of water wise plants that still look good, but grass is always perfered for some reason.

    No, raising prices isn’t the answer, education is. Changing of mind sets is the only thing that is going to make a bit of difference, and it sure doesn’t seem like price increases do anything to change people’s minds.

  7. Wilfried on July 20, 2005 at 5:08 am

    That’s a very needed topic, Frank. When you read specialist reports on the water situation in the world and the projections for the future, it’s very worrisome. I realize statistics can be interpreted in various ways, but the global reality is inescapable.

    On detail level: one thing outsiders find strange in Utah, it’s the sprinkling of lawns around chapels. I guess locals will explain it’s only very minimal compared to what agriculture uses, and that the cost is insignificant (?), but still it sends the wrong message that water can be used even for needless things. Chapels don’t need lawns when water conservation becomes an issue. Should the Church not set an example and show more interest in environmental issues? So, for when xeriscape ward projects? Though just pebbles, rocks and desert plants around a chapel would be fine too. As a reminder of pioneer heritage.

  8. Sue M. on July 20, 2005 at 8:41 am

    Regarding #7: I used to live in Las Vegas. In terms of water conservation, the Church behaved just like any other business – when the water district started offering incentives for pulling out grass and installing xeriscaping, raised the cost of water, and established rules and guidelines for installing grass, the Church started renovating their landscaping – new and existing.

    In Las Vegas, the water situation is pretty grim. Water conservation has been addressed by the water district there in a number of ways – drastically increasing the price of water, setting guidelines for precisely when you may water (you are given a specific day and time when you may water – if you stray from the schedule, you are fined quite severely), establishing rather high penalties for wasting water, prohibiting the installation of grass in the front yards of any new home or business, and offering financial incentives to people and businesses who pull out their grass and put in xeriscaping. Some businesses that are seen as essential to tourism (casinos, duh) receive exemptions because the water features are tourist attractions. Some, but not all, golf courses receive exemption – they have to use recycled water, and some are simply deemed non-essential and are subject to the same water restrictions as other businesses and the courses are rapidly browning out.

    The price increases and other restrictions HAVE changed behavior there. Go to a new subdivision, and it’s all rocks and xeriscaping. It looks like the surface of the moon, unfortunately, because in most cases it is NOT done well. It’s very ugly, but water conservation is essential when you live in a desert. Las Vegas isn’t even a desert really, it’s just dirt.

  9. Frank McIntyre on July 20, 2005 at 9:05 am

    Aimee,

    The recent gas price increases may have caused the relative price of owning SUV’s to be slightly higher, but not much. I am talking about making water being several times higher than currently. So yes, this kind of price increase will have an effect on behavior.

    As for education, that is exactly what a high price is. If the price is right for water I imagine people can do their own educating on the best ways to implement water savings. As often as not, other education programs are really more propaganda than innocent attempts to inform. High prices are a much better information signal, and they raise money rather than cost money.

    All,

    Thanks for the comments! I should make clear that I have no moral vendetta against grass. We have a lawn which we enjoy very much. I am fine with people having lawns anywhere in the world they wish— as long as they pay the societal cost of having that lawn. Conveniently, in a well run market, the price of water would exactly reflect that societal cost. I am also fine with people not putting in lawns and instead putting in more drought tolerant landscape. It is, to me, a matter of personal preference- not morality.

    If the water shortage were so severe that my lawn was causing other people to not have enough to drink or eat, that would be a different matter, and I would gladly contribute to a fund to make sure others had enough water to live. I know of no state in the U.S. where we are even remotely close to having that little water. Not even remotely. So outside of that, I have no a priori belief about how water is supposed to be used, once the price reflects the societal cost.

  10. John Mansfield on July 20, 2005 at 9:29 am

    Claiming that the price of something should be raised so people will use less of it has the same standing as claiming the price should be lowered so people will use more. These claims assume some knowledge of how much should be consumed. If the water bills are covering the expense of providing water, and there are no more water sources, then the price is right. If prices were raised, where would the money go? To build a pipeline to Alaska?

  11. Frank McIntyre on July 20, 2005 at 9:45 am

    John,

    “These claims assume some knowledge of how much should be consumed.”

    Your argument is geared towards a market price, in which case I agree. The market price typically contains all the needed information and so we needn’t mess with it. Utah water prices are not market prices. They are set by utility companies regulated by the state or city. The fact that there is so much talk about conservation is a clear signal (to me) that the price is being set arbitrarily too low. And we know that a price set too low leads to over-consumption.

    Water not used this year can be stored in reservoirs for a non-rainy day next year. So it is not the case of merely balancing today’s demand with today’s supply. The proper market price balances supply and demand over years or decades, through feast and famine.

    The money raised could be used, as I noted in my post, to lower property taxes or sales taxes, or anything else one wished. Possibly one could use them to enhance the infrastructure that gets us watershed from the mountains, depending on how easy that is.

  12. Last Lemming on July 20, 2005 at 9:58 am

    If prices were raised, where would the money go?

    Toward mitigating the external costs of providing water and toward expanding supply. For example, other resources are destroyed when valleys are flooded by reservoirs. Some could go toward replacing those resources. Some could go to transition relief for farmers (or [holds nose] even golf course owners) priced out of the water market. But I should think most of any surplus should go to desalination research.

    Frank,

    What would you think (legalities aside) of throwing out the Colorado River pacts and having the federal government auction off the water rights (assuming, of course, that revenues would be used as I propose above and not just as a cash cow for the government).

  13. lyle stamps on July 20, 2005 at 10:19 am

    If CAFTA isn’t passed, all the more reason to give the beet farmers the boot. They have lived off of the public’s mammary gland for far too long

  14. Frank McIntyre on July 20, 2005 at 10:35 am

    LL,

    I don’t know anything specific about the pacts, so conceivably there is some externality problem they now solve or used to solve. I doubt it though. And barring that, an auction every month or year sounds like a great idea.

  15. Sue M. on July 20, 2005 at 12:10 pm

    Las Vegas already faces periodic water shortages. With increasing population and decreasing water supply, there is often talk of water rationing. They are spending millions to promote water conservancy for precisely this reason. The water authority is constantly looking for alternate sources of water, and YES (even though it was said in jest), they have thought about building a pipeline. Not to Alaska, but to a closer alternative source – rural northern Nevada.

    “If prices were raised, where would the money go?”

    In Las Vegas, the fees and excess funds go to upgrade the water delivery system, to improve technology, to find alternate sources of water, to continue water conservation education and rebate programs for water-efficient technologies.

    And it IS working for LV. From the Southern Nevada Water Authority website: “Southern Nevada’s water use declined by more than 15 billion gallons from 2002 to 2003, despite the fact that there were more than 60,000 new residents in 2003. Water use continued to decline in 2004. Between 2002 and 2004, Southern Nevada’s consumptive water use decreased by about 18 billion gallons, despite nearly 170,000 new residents and 37 million annual visitors. Since the Water Smart Landscapes rebate program began in 1999, the community has replaced more than 51 million square feet of grass, saving more than 2.8 billion gallons of water each year. The community converted a record 32 million square feet of grass to water-smart landscaping in 2004. That’s nearly triple the previous record of 11.8 million square feet in 2003.”

  16. John Mansfield on July 20, 2005 at 12:11 pm

    Brother Frank, I am not talking about a market price. I am talking about regulating a monopoly provider to not allow it to sell its product at a prices far beyond its cost. Alternative providers would exert that control in a market. Since you would use extra revenue from higher prices for non-water functions, like reducing sales tax, I get the idea that you simply prefer financial pressure to haranguing and coersion as a means to influence behaviour.

    As for leveling the supply across years, I have limited knowledge about this, but look at this diagram for the current status of Wasatch Front River Basins. After years of drought, one wet spring has brought the reservoirs up to full capacity. It appears they serve to level the supply across months, not years. For that matter, it appears there would be nowhere to impound water conserved this month. Of course, water flowing on to the Great Salt Lake or the Gulf of California can be a good thing too.

    As for an annual water auction, having water arranged for decades down the road seems like important civic planning.

    Last Lemming, if there are water resources that could be developed with water at a higher price that people would pay, then I see your point. Desalination will only help those who aren’t too high above the shore.

  17. Last Lemming on July 20, 2005 at 2:04 pm

    As for an annual water auction, having water arranged for decades down the road seems like important civic planning.

    I didn’t specify a frequency in my question to Frank, and was surprised when he mentioned monthly auctions. I was thinking annual would be a stretch. Without some degree of certainty, investment in the delivery infrastructure is likely to be neglected, so perhaps water could be auctioned off in two batches. The first batch, representing the amount expected to flow in the dryest of 20 years could be auctioned off for a 20 year period. Excess flow could then be auctioned off at the beginning of every spring when they have some idea how much it will be.

    Desalination will only help those who aren’t too high above the shore.

    Directly, yes. But if southern California could be supplied with desalinated water, what they now pump out of the Colorado could be redirected upstream, benefitting the entire basin.

  18. Frank McIntyre on July 20, 2005 at 3:56 pm

    John- if we have a water shortage, then the regulated price is apparently too low. Speaking to those who know, the price paid is also well below average cost in many cases.

    “I get the idea that you simply prefer financial pressure to haranguing and coersion as a means to influence behaviour.”

    If by “simply” you mean that financial pressure works and is cost effective while coersion is ineffective and costly- then that is exactly right. Haranguing is a very inefficient way to allocate resources. That’s why we have markets.

    I am perfectly happy having the money go towards raising supply. If that is not feasible, I think the demand effect is sufficient to justify raising prices. The idea with lowering other taxes is to point out that the whole scheme can be done in a “revenue-neutral” way that does not cost any more than the current system. Revenue neutral changes are sometimes more politically feasible.

    I looked into desalination. I was surprised at how cheap it already is. Perhaps a few dollars per thousand gallons.

    As for conserving water across years, is reservoir capacity fixed? And in past years, some people conserved who needn’t and others used water who didn’t need to as the state tried to conserve water through the drought. So not only does the intertemporal allocation get messed up, but the water in a given year is not distributed efficiently.

    I think Last Lemming hit the other key points worth mentioning. I certainly don’t care what frequency the auctions are held at. Presumably once an auctioning mechanism was set up, agents could later renogotiate in secondary markets. My point was not to say what the optimal frequency was, just to point out that the mechanism was a flexible one to meet whatever needs people had.

  19. John Mansfield on July 20, 2005 at 4:56 pm

    Is it still a market if there is one seller and multiple buyers? I get the idea that adjusting the price up would drive consumption of a limited resource to its most valued uses. For the person who wants a lawn, though, I don’t see how eliminating that possibility through high water prices is different from doing so through rationing if neither increases the water supply.

  20. Frank McIntyre on July 20, 2005 at 5:23 pm

    The problem is that the market is not setting the price. The regulatory body is. Thus the price is not a useful allocation signal. Limiting use through higher prices would mean that the people who no longer had the lawn were those not willing to pay for it. In the rationing case the resource is distributed quasi-randomly across the population.

    And the money brought in can then be used to increase supply or, if that won’t work, lower the tax burden, in either case it can benefit those originally without the lawn. And so the guy who pays a lot for his lawn is happier because now he has a lawn that was not regulated away. The guy without the lawn has lower property taxes or perhaps increased supply makes it feasible for him to now have a lawn. Everybody can be better off.

  21. John Mansfield on July 21, 2005 at 7:35 am

    There are two prices I can think of in this situation. The first is the one that causes buyers to buy up the entire supply and no more. The second is the one that maximizes sales revenue. Is there a reason to prefer one over the other? What does each signal? From what you have written so far, I suppose you want the revenue maximizing price since that one turns over more money from the buyers to purposes like reducing other taxes and reduces the number of buyers receiving water at a price below its value to them.

  22. Frank McIntyre on July 21, 2005 at 8:44 am

    John,

    When there is storage across periods, then it does not make sense to want people to buy up the entire supply each period. It also does not make sense when there are multiple communities with different needs. Also, I am very doubtful that there is any such thing as “The Supply” all of which is available at the same price. There is likely some water that is cheaper to use and some that is more expensive. This should also be factored in so that the price is higher as people use more.

    The optimal price is the one that equates value of water _across years_ so that there is the proper incentive to both enhance supply and conserve water. That is neither the monopolist price (which maximizes profits) nor the revenue maximizing price, nor the price that uses all available water in that period. It is lower than the first and higher than the third.

  23. John Mansfield on July 21, 2005 at 11:02 am

    There is likely some water that is cheaper to use and some that is more expensive. This should also be factored in so that the price is higher as people use more.

    This seems to return a connection between the price of consumption and the cost of production. It also sounds like the cheap water would be rationed; each home gets so much, each acre of farmland gets so much, each power plant and factory gets so much, with someone assigning the balance between people, agriculture and industry.

  24. Frank McIntyre on July 21, 2005 at 12:41 pm

    Not quite. You charge everybody the price of the most expensive water that people still use. Because that is what you save, societally, if anybody uses less water. As I noted in the post, you could give out some amount of water free or low cost to any or everybody as long as it was not anybody’s marginal water, because that would not affect their incentives. This is also what the market price would be if there were a competitive market. The market price also gives the proper incentive for developing more supply– because the higher supply would be as valuable as the most expensive water currently consumed..

  25. John Mansfield on July 21, 2005 at 3:04 pm

    Ah, I misunderstood. I thought “the price is higher as people use more” meant the price an individual pays goes up as that individual uses more. I was thinking of the progressive pricing used for my water bill. Thanks for the econ tutoring. I am still doubtful, though, that surplus water revenues that aren’t used to develop water resources would end up devoted to the good of mankind.

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