The four-year drought in North Carolina has reduced water supplies in most communities. Local governments have dealt with the situation by rationing water usage through various kinds of restrictions, such as limits on daily watering and banning of sprinkler and irrigation watering.
But such rationing by government edict is not the only way to reduce water usage. Another way is the system that’s used to ration virtually every product and service in our economy. It’s called the price system. Let’s contrast the two methods.
Government-dictated rationing has been used often during economic crises. In World War II, certain foods, gasoline, and other commodities were rationed. Households were required to present government-issued coupons to purchase rationed products. In the gas shortage of the 1970s, the government rationed gasoline by limiting days on which motorists could buy gasoline.
One of the appeals of rationing is it is viewed as “fair.” Everyone supposedly shares equally in reduced consumption. The rich can’t “buy their way out” of reduced consumption and use the scarce products for “nonessential” uses while the poor have trouble obtaining enough of the commodity for “essential” uses.
Yet there are several problems with rationing. To be effective, it must be enforced, and this means government expenditures for enforcement. Enforcement includes surveillance, documentation of cheating, and punishments for infractions.Many households may have issues with this level of government intrusion into their daily lives.
But more fundamentally, rationing assumes the government knows the value each consumer places on the rationed commodity. And rationing requires government micromanagement of the rationed commodity’s uses.
There is another way. It’s to allow the price of the product to reflect its scarcity, and then let each consumer decide how much to use of the product, and in what ways.
Sound familiar? It should, because this is how our economy operates most of the time. In our economic system, price is used to ration the supply of products. There is a limited supply of every product and unlimited uses for them. The price of the product communicates the relative scarcity of it to consumers. Higher prices indicate greater scarcity and motivate consumers to use the product more frugally.
Additionally, a major advantage of the price system is it allows each consumer to individually decide how much to change consumption when price changes. There is no “one size fits all” as there is with rationing by government edict. Consumers who place more value on a product will reduce consumption less when the product’s price rises than consumers who don’t value the product as much. Under the price system, consumption is allocated to those who most value the product.
Drought managers have two approaches to dealing with scarcer water supplies: a rationing system micromanaged by the government, or the price system in which consumers voluntarily change usage in line with changes in prices. I recommend the price system, and here’s why.
First, the price system allows consumers the freedom to decide how and how much to reduce water consumption when water becomes scarcer. When droughts occur, water systems will increase price enough to reduce aggregate consumption to the desired level. Each consumer, however, decides how to do this, deciding what water uses are most and least important to her.
Second, higher prices for any increasingly scarce commodity ultimately motivate producers to supply more of the commodity. In the case of water, this can occur in two ways. Water can be transported and stored, so higher water prices will motivate enterprising business people to deliver more water to our state. Water trucks transporting out-of-state water to storage drums and facilities in North Carolina could become a common sight in drought years. Also, higher water prices paid to public water systems could provide funds for construction of new water reservoirs.
There is one potential problem with using the price system when water becomes scarcer. Critics will claim poorer households won’t be able to afford the higher water prices, while richer households can.
This is the classic tradeoff between efficiency (higher prices encourage frugal use when increased scarcity occurs) and equity (those with more resources can always afford greater consumption). It can be addressed by using some of the proceeds from higher water revenues to public systems to supplement the income of low-income households, perhaps through the provision of “water stamps”.
Water is usually so plentiful that we forget it is a scarce resource in our economy. Rather than going down the complex road of having government try to decide who can use water for what, and how much, during times of increased scarcity, we can use a simple method that is already in place — the price system. Some will say water is too important to allow price to dictate its use. I say just the opposite — the importance of water means price must be used to guide its use.