Page 121 - The Principle of Economics

CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES 121
IN THE NEWS
Does a Drought Need to Cause a Water Shortage?
DURING THE SUMMER OF 1999, THE EAST coast of the United States experienced unusually little rain and a shortage of water. The following article suggests a way that the shortage could have been averted.
Trickle-Down Economics
BY TERRY L. ANDERSON AND
CLAY J. LANDRY
Water shortages are being blamed on the drought in the East, but that’s giving Mother Nature a bum rap. Certainly the drought is the immediate cause, but the real culprit is regulations that don’t allow markets and prices to equalize demand
and supply.
The similarity between water and
gasoline is instructive. The energy crisis of the 1970s, too, was blamed on na- ture’s niggardly supply of oil, but in fact it was the actions of the Organization of Petroleum Exporting Countries, com- bined with price controls, that was the main cause of the shortages. . . .
Once again, regulators are respond- ing to shortages—in this case of water— with controls and regulations rather than allowing the market to work. Cities are restricting water usage; some have even gone so far as to prohibit restaurants from serving water except if the cus- tomer asks for a glass. But although cities initially saw declines in water use, some are starting to report increases in consumption. This has prompted some police departments to collect lists of res- idents suspected of wasting water.
There’s a better answer than send- ing out the cops. Market forces could ensure plentiful water availability even in drought years. Contrary to popular be- lief, the supply of water is no more fixed than the supply of oil. Like all resources, water supplies change in response to economic growth and to the price. In de- veloping countries, despite population growth, the percentage of people with access to safe drinking water has in- creased to 74 percent in 1994 from 44 percent in 1980. Rising incomes have given those countries the wherewithal to supply potable water.
Supplies also increase when current users have an incentive to conserve their surplus in the marketplace. California’s drought-emergency water bank illus- trates this. The bank allows farmers to lease water from other users during dry spells. In 1991, the first year the bank was tried, when the price was $125 per acre-foot (326,000 gallons), supply ex- ceeded demand by two to one. That is,
many more people wanted to sell their water than wanted to buy.
Data from every corner of the world show that when cities raise the price of water by 10 percent, water use goes down by as much as 12 percent. When the price of agricultural water goes up 10 percent, usage goes down by 20 percent. . . .
Unfortunately, Eastern water users do not pay realistic prices for water. According to the American Water Works Association, only 2 percent of municipal water suppliers adjust prices seasonally. . . .
Even more egregious, Eastern water laws bar people from buying and selling water. Just as tradable pollution permits established under the Clean Air Act have encouraged polluters to find efficient ways to reduce emissions, tradable water rights can encourage conservation and in- crease supplies. It is mainly a matter of following the lead of Western water courts that have quantified water rights and Western legislatures that have al- lowed trades.
By making water a commodity and unleashing market forces, policymakers can ensure plentiful water supplies for all. New policies won’t make droughts disappear, but they will ease the pain they impose by priming the invisible pump of water markets.
SOURCE: The Wall Street Journal, August 23, 1999, p. A14.
oil raised the cost of producing gasoline, and this reduced the supply of gaso- line. As panel (b) shows, the supply curve shifted to the left from S1 to S2. In an unregulated market, this shift in supply would have raised the equilibrium price of gasoline from P1 to P2, and no shortage would have resulted. Instead, the price ceiling prevented the price from rising to the equilibrium level. At the