(This post contains many puns, most totally unintended. It turns out lots of economic terms about price movement are about water. My apologies, but not enough apologies to get rid of them.)
Libertarians have a rule of thumb: “Anywhere you find a shortage, look back and you’ll find price controls causing it.”It’s almost always true; maybe actually always. What does that have to do with anything? Bear with me a moment.
If you enjoy laughing at libertarians who are self-parodies, read this article. It is a heavy dose of First World Problems blown out of proportion. And yet? He’s got a point.
In the United States, we introduce costly regulations for consumer water use that reduce it by respectable but not large factor; cut 30% or so, optimistically. And all consumer water use is only 2% of the total.
In California, billboards in every city remind you “Conserve Water! It’s a Drought!”. Meanwhile, almond farms use far more water, and alfalfa farms use tons to grow plants that aren’t particularly well-suited to California weather and immediately get shipped overseas when harvested. If we were managing this effectively, there would not be alfalfa farms in formerly-arid parts of California.
In Flint, Michigan, the residents have to buy bottled water at exorbitant expense because their pipes can’t deliver it to them. Meanwhile, nearby, Nestle makes a killing buying water rights and packaging it as bottled water.
These have something in common: Water is being poorly allocated. The residents of Flint, and many other American cities, value clean water far more highly than Nestle does, but Nestle can negotiate for the water rights more effectively and the populace can’t even attempt to outbid them. California urges a small fraction of the water consumption to be cut, because farms are pumping water to dry areas that don’t make sense to farm in to grow crops better suited to other places.
The common thread is a fixed price of water from the pipes that doesn’t respond to supply and demand. The water the farms use is worth more than the farms are paying, but it is going to suddenly run out and then not be available at that price any longer. If the system was stable, the price would rise as projected supply (i.e. rainfall) dropped. In Flint, the managers of the water supply could only make a fixed profit from selling it through normal channels, but negotiating the rights to Nestle had no such barriers and it could float to a market price.
Of course, these restrictions on price exist for a reason, and the goal is good: Everyone should have enough clean water to drink. But in Flint in 2016, and California in ~2020, this isn’t likely to happen. The problem with a price control is that it affects everyone; if the price of water is the same for the consumer drinking it and the farm watering alfalfa, you can’t subsidize one without subsidizing the other. When >90% of the water consumption is now being subsidized for the sake of the other <10%, many enterprises will show up which would be wildly unprofitable if they had to pay what the water was worth but can thrive on the cheap supply of water. When bottled water, even in bulk, is so much more expensive than tap water, companies will turn one to the other and net a hefty profit, and consumers whose tap fails have their water costs skyrocket.
Consider an alternative: Government subsidy of drinking water only. Provide a large tax credit for consumer water expenses (personal use only), perhaps 90% of the cost, and let the prices float free. The water company can raise rates until they have supply managed, and if the citizenry suddenly needs to switch to bottled water they won’t have such a massive jump in cost.