The Opportunity Cost of Water

(Photo: rumpleteaser)

With the continuing drought in South Texas, the issue of how to allocate scarce water resources has flared up again. Rice farmers south of Austin want water from the Colorado River for their crops; yet the two storage lakes on the river, which provide most of the Austin area’s drinking water, are less than half full.  As one rice farmer told the the Austin American-Statesman: “Water availability should be based on sound hydrology and not on political pressure.” It should be based on neither—it should be based on economics—what is the opportunity cost of the water?  In particular, one might ask why the U.S. is growing rice at all.  It is hard to believe we have a comparative advantage in rice-growing and that it shouldn’t all be imported.  That’s especially true about rice grown in dry South Texas. We grow rice because of entrenched interests that obtained water rights many years ago.  The rice farmers get heavily subsidized water precisely because of the political pressure this man deplores—and they now want to compound the effects of bad policy.

scott foster

There are many usage issues but as a long time fan of freakonomics and south Texan I would welcome a different approach to the drought issues in South Texas. I just don't think anything will happen until the day folks turn on the valve and nothing comes out and it takes guns to solve the issue. How would you go about introducing an economic solution. Let's start with who is the rightful owner of the water?

Mike B

I'd try an auction.


oh, what will we do without our Texmati?!

Enter your name...

I'd be happy to address the issue with sound hydrology. Sound hydrology says to quit growing rice in the desert or near-desert areas. That applies to both southern Texas and southern California.


Sure, but sound hydrology also suggests not building major urban areas in desert or near-desert areas, too. At least unless you can convince the people who move to them to do without bluegrass lawns, car washes, and toilets that use water.

Enter your name...

I'm not so sure about that:

* An urban person probably doesn't flush his toilet more often than a rural one, so the location of the flush toilets doesn't affect how much water is used.

* An urban resident may not own a car at all, whereas rural ones commonly own at least one for every adult. When I grew up in the country, we had six vehicles for four drivers, and washed them all with a hose because the water-efficient car washes were miles away.

* There may not be a single blade of grass at an urban home. Neither my home nor my in-laws urban home has any grass, and I understand that having either no grass or a postage-stamp size patch of grass is pretty typical in urban areas. When I was growing up, we mowed two acres of grass, and ours was the smallest lot around.

If I needed to put a million people in a desert area, I'd choose a dense, walkable, urban city over a sprawling suburb or rural area. San Fransisco residents use only two-thirds the amount of water that the average American does, and less than half of some sprawling cities like the greater Dallas/Fort Worth area.


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There are, by the way, good reasons for a country not to import all of a staple food like rice. If you import 100% of your staple foods, then your food supply is vulnerable to wars and other massive disruptions. It's not a good policy to have a food that many people eat every day to be dependent on the ability of the port workers and employers to get along, much less to be dependent on good political relationships between China and the U.S.


but is rice really an American staple food?
On average, one American consumes as much energy as;
2 Japanese
6 Mexicans
13 Chinese
31 Indians
128 Bangladeshis
307 Tanzanians
370 Ethiopians

I think that that is an even bigger problem.

Enter your name...

The average American eats about 25 pounds of rice a year.

Currently less than four pounds of that is imported. This is probably a good thing, but there's no good reason to grow it in the driest parts of the country. Rice should be grown in wet places.


I have to go with the sound hydrology. This is yet another instance where economics just doesn't work (or perhaps it would be better to say that it's not allowed to work) because the legal/societal framework allows a small number of people to make large profits by dumping costs on the rest of us.

We could also turn the argument around, and ask why it's better to use scarce water supplies to foster the growth of large urban areas, rather than to grow food.

Eric M. Jones.

Texas Rice Growing? Seriously? Texas grows very little rice compared to Arkansas, Louisiana, Missouri, Mississippi, California, etc.

BTW The Colorado river you refer to is not THE Colorado River that flow to the Gulf of California, but just a tiny rivulet that is a local Austin issue.

BTW: A large portion of the real Colorado River is siphoned off by Denver, Colorado area via several trans-continental-divide tunnels. I would think this should be a national debate.


So, maybe water could be rationed like the Fair Tax rebate. (You know, where the basic cost of living is figured out, and the gov't pays you back that tax money?)

So why not figure out what the base amount of water is needed per household based on the number of occupants, figure out how much that will cost at the minimum (or give it away for "free"), and then let the free market decide on the rest of the water? Need water for crops? Let the cost go up or down depending on demand. Don't want to put in water reduction toilets and sinks in your business? No problem, you'll just be charged more for it.

So, kind of let water be sold like gasoline.


Why does Texas water belong to the people and oil and gas in Texas belong to the land owner?Lets also find out the amount of oil and gas needed per household based on the number of occupants and allocate that to each resident for free and pay for excess usage.


If you go to the trouble and expense (around $10K) to drill a well for your personal use, the water does belong to you.

Kevin Shmevin

End farm subsidies.

kathi mestayer

Even if we found a way to direct water to the real, highest-value uses (free market solution) it's still a good idea to use less on lawns. The City of Tucson has a no-residential-front lawn ordinance. And lots of lovely desert landscapes. Added benefit; maybe a natural disincentive for burglars? Who wants to race away from a home in the pitch dark through a yard full of barrel cacti?


Indeed a spaghetti of priorities...Disaster Status droughts in the Southern Cape area of South Africa posed exactly this challenge - do you allocate scarce water to Industry, Municipalities or Agriculture? But be carefull it's not the seemingly false economics of growing's growing jobs, rice is merely the vehicle. The question remained in our SCape case...who's job is the most important - the social impact of the decision is sometimes frightening. Furthermore , does the decision maker consider the pre-drought prudence of the sectoral water user? - eg uncontrolled topping up of swimming pools against dairy farmers "importing" water in the form of fodder from water rich areas thereby "subsidizing" other delinguent sectors.

Dave Hodgkinson

I'd always known about "Texmati" rice, but it surprised me when I found that in the UK our favourite brand of Japanese sushi rice also came from Texas! Not a place I'd associate with paddy fields.


Yes this is true if domestic protection is in place. The issue here may be that water is not being priced correctly for commercial use. It is interesting to review the value added per litre of water by industry ( these stats are available across multiple industries in australia and i am sure in the US). Cotton and rice are water intensive for sure, interestingly red meat production also has a very high water intensity. The question of opportunity cost is a good one, but as stated, muddied by politics and long standing and potentially antiquated water allocations.

Allen Baird

Economics, I researched water and gave a report on it's availability in West Texas and future plans in the works and economics and industrial growth were tied together all the way.

Mark Watson

At face value, why grow rice in an area with limited water?
From memory rice needs about 12 ML/ha (million litres per hectare), whereas most other high value crops only need 2.0 - 4.5 ML/ha.
It doesn't make sense to fight nature - use high water consuming crops where there is lots of water, and low water consuming crops where there isn't. Perhaps the Mississippi is a better option than the Colorado for growing rice? It might help NOLA recover from hurricane Katrina as well.
I am a great believer in basing regional development on the assets you have rather than those you don't.
Perhaps like infrastructure, consumers tend to want everything where they live without a lot of consideration for the difficulties (read financial and environmental cost) for providing such amenity? Maybe I'm jaded from 24 years working in a water utility!
I think we need to get our price 'signalling' right - if people want to live in the desert, they must pay more for water than people in Seattle for instance, then let economics determine project viability or otherwise. Nothing against Seattle either; I love that city and would live there tommorrow if I had the chance. (Thinking about clam chowder on the wharf now)
I agree that developers are very powerful influencers of water development policy, yet some developers only tend to be around til the end of the defects liability period and no where to be seen when the project is 20 years old and running into supply difficulties.
Planners ALWAYS use worst case scenarios - that our job, and it's in our engineering blood. It's only when political forces get involved that logic goes out the window. That's why as an infrastructure planner, it is critical that Boards are made aware of the risks, liklihood, consequences and NPV's of developments so that short term political decisions don't wreck long term consequences of their actions.



I'm a fan of basing water prices on supply. As the reservoir drops, the price rises. That simple. So often, rationing is imposed which ruins the free market. Then, the reduced usage always leads to a budget shortfall. So when the rain falls again and there is plenty, the price is hiked to make up the shortfall.

Of course everyone screams that water is essential and we can't raise the price and people will die, etc etc. But food and gas rise and fall all the time. Water should do the same. It's really cheap to buy enough water to survive.

If Austin's reservoir is half full and dropping then the price should be going up! People are then forced to make hard choices that are based on appropriate supply and demand, not artificial political pressures.


Mary, to take your point further, the rice farmers should pay the going rate - $151/acre ft. vs the $6.50 that they currently pay. And then let's see how bad they really want 20% of the reservoirs.

Engida Sewnet

The reason most developing countries, especially the ones in African with more arable land and which are normally agriculturally endowed, are not able to transition from subsistence to commercial agriculture, aside from bad policy, is the wasteful agricultural policies - farm subsidies and price controls that basically insulate most European and US farmers. Common Agricultural Policy (CAP) alone makes up about 48% of EU's budget. If global farmers are not able to profit off of European and U.S. consumers, there is no incentive for them to use the land efficiently and produce more cash crops. This stifles development and keeps millions in poverty around the world.

If the U.S. doesn't have a comparative advantage in rice-growing, then it should import rice. Our next rice will probably come from Africa - government ban on non-Basmati rice exports is already driving Indian firms to grow it in Africa to sell overseas. End the farm subsidies and do away with food aid, which is costly in itself. This will also be the best policy to end global poverty.



I wonder how much money is government subsidies for the growers if they have a crop or not????

Also, the rice farmers makes money leasing the flooded fields for goose and duck hunting.

hugo contreras

Wouldn´t the same rationale apply to all water consumers? Furthermore, after some international institutions have been promoting tariffs equal to costs, the time is up to rise the standard and incorporate scarcity value and not only operational and maybe infrastructure replacement costs. If we do so, perhaps polititians will accept at least full cost pricing.

James Ehlers

Virtually all of us are getting subsidized water, which is both financially and ecologically unsustainable--to wit our growing pollution problems and crumbling infrastructure. This not merely an environmental issue, but public health and commerce issues. Pollution unabated threatens economic development, our personal health, and our property values.

Maurice Haff

Ag irrigation is one of the largest users of water in the USA and around the world. Use of ground water for irrigation purposes is resulting in unsustainable depeltion of aquifers as well as surface water resources. New technologies are available that can be incorporated into ag practice to reduce and mitigate depletion. A more equitable pricing structure based on open market value of water in each region of the USA would drive adoption of new technologies and improved water use practices. The side benefits of doing this are reduced run off and less energy use (less pumping). Reduced run off would improve down stream water quality. Less energy use will provide offsetting cost savings for farmers.


I'm torn on this one. I, too, find it hard to believe that we have a comparative advantage in rice-growing, especially in Texas. However, I also feel that if the rights belong to you and you're dropping the cash for wells and such, then the water is yours to use however you please. Beauty of capitalism, I suppose.