Water and gasoline. They don’t mix well; they aren’t substitutes in refreshment, thirst-quenching ability, or industrial use. There are a few market comparisons that may be worthwhile, though. Due to the effects of weather, and politics, both have become more scarce. And on the demand side, use of both water and gasoline usually rise each summer. Most of us feel lucky that compared to gasoline, water is still plenty cheap. We might be better off if it weren’t.
This summer, residents of some North Carolina communities may find it easier to put gas in their cars than to fill their swimming pools, or put water on their crispy summer lawns. The reason isn’t drought alone: fundamentally, it’s the price of water. In other markets, consumer and supplier plans are coordinated because price inhibits overuse or undersupply. When municipal water is delivered at a single price, the self-regulating mechanism that balances individual desires and community welfare breaks down.
Price the culprit rather than drought? The price of an item condenses vast amounts of information about scarcity on the supply side, as well as urgency of wants on the demand side. Price represents all of this data in a single, concise—changeable according to market conditions—number.
When prices for goods are set administratively—by a public utilities commission or the like for water —prices can’t reflect changing conditions. A period of peak demand or drought quickly uncovers the fault in this plan. As market values rise in a crisis, the regulated price does not. Shortages and arbitrary rationing schemes are all that are left to try to control consumer use. There is no reason to suspect that day of week or house number, as water usage plans, are better correlated to consumer desires, or to the cost of supplying additional gallons, than is market price on any given day.
Some communities may balk at the idea, but market pricing puts the user in control, and works just as well to allocate essential, seasonal, and discretionary demands. Even in the chronically water-challenged western United States, pricing water according to supply and demand works. In Santa Barbara, California, the per unit price of water for each household increases as its water consumption rises above the ‘subsistence’ level. Officials anticipate that increased prices in the long term will have other effects: households will decide it is worthwhile to install water-saving equipment, reducing their water use over time. With water-saving technologies in place, conservation is continuous, not a short-term water crisis Band-Aid.
Compare briefly the market for gasoline to that for water. Policy makers have mostly kept away from overt price controls at the gas pump. And unlike the current water crises in many places—excepting the price control anomalies of the 1970’s—retail gas exhibits no artificially controlled or restricted, individuals are forced to make decisions in the dark. For the community as a whole, trying to coordinate the demand and supply of water becomes something like playing “Battleship,” without the ‘hits’ or ‘misses’ report. All markets ‘grope’ toward coordination, so information feedback is critical to better decisions on the next round.
Policy makers and economists can agree on the fundamental need for water to sustain life, but for the most part, a gulf (pardon) still appears to separate their positions on how best to ensure an adequate supply. Especially in a drought period, making an extremely scarce commodity like water available over a prolonged period of time is a challenge.
As one conservator of a very scarce supply of a particularly hip and rare water found, however, you can do it—if the price is right.