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.


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.

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Mary

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.

Ronda

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.

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Paul

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.

Gr4mb0

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.

AJ

If you want to know about political pressure with regard to water policy, just come up here to Canada and whisper "export water to the States." Always draws howls of protest.

http://en.wikipedia.org/wiki/Water_export#Water_exports_from_Canada_to_the_US

kathi mestayer

I get what you're saying, but that's not the microeconomics definition of 'opportunity cost.' Opportunity cost is the value of option "b" that you miss out on by pursuing option "a." It's the cost of a lost opportunity.