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The Real Cost of California's Drought

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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As California heads into its fourth year of drought, Governor Jerry Brown is taking the unprecedented step of ordering mandatory rationing:

Brown issued an executive order seeking a mandatory 25 percent reduction in use and a requirement that new homes feature water-efficient irrigation if the builder plans to use potable water for landscaping. He also called for 50 million square feet of lawns to be replaced with drought-tolerant landscaping and required campuses, golf courses and cemeteries to cut back on water.

California has to do something -- many of its reservoirs are half-empty, and the Sierra Nevada snowpack, which provides much of California's water, is far below normal levels. But that doesn't mean it should do this particular thing. California's proposal is far too heavy on top-down regulatory management, and far too light on pricing.

I've seen a lot of apocalyptic writing about California only having a year of water left (not true),  and I've heard some idle talk about whether California can continue to grow. But California's problem is not that it doesn't have enough water to support its population. Rather, the problem is that its population uses more water than it has to. And the reason people do this is that water in California is seriously underpriced, as Marginal Revolution's Alex Tabarrok notes. While the new emergency rules do include provisions for local utilities to raise rates, that would still leave water in the state ludicrously mispriced. According to Tabarrok, the average household in San Diego pays less than 80 cents a day for the 150 gallons of water it uses. This is less than my two-person household pays for considerably less water usage, in an area where rainfall is so plentiful that the neighborhood next door to me has a recurrent flooding problem.

Artificially cheap water encourages people to install lush, green lawns that need lots of watering instead of native plants more appropriate to the local climate. It means they don't even look for information about the water efficiency of their fixtures and appliances. They take long showers and let the tap run while they're on the phone with Mom. In a thousand ways, it creates demand far in excess of supply.

Having artificially goosed demand, the government then tries to curb it by mandating efficiency levels and outlawing water-hogging landscaping. Unfortunately, this doesn't work nearly as well as pricing water properly, then letting people figure out how they want to conserve it. For one thing, you can only affect large and visible targets, such as appliance manufacturers or lawns. For another, people will often try to evade your regulations -- my low-flow showerhead came with handy instructions on how to remove the flow restrictor. And, perhaps most important, you limit the potential conservation to the caps. So people have an efficient dishwasher but don't consider doing small loads by hand; they have a low-flow showerhead but don't consider taking shorter showers. In short, no one is looking for ways to conserve more than whatever you've mandated. This may be enough to temporarily manage the current crisis, but it does nothing to set California's water usage on a more sustainable path.

I know what you're going to say: Higher water bills will hurt the poor. But as Tabarrok points out, these bills are such a small portion of household budgets that even doubling them wouldn't make much difference. Moreover, the biggest subsidies in California are going to agriculture. Thanks to these subsidies, California is planting water-intensive crops such as rice and almonds even as it starts fussing about residents' lawns.

If we're truly worried about the poor, we could set some minimum amount of water that would be sold at a very cheap rate, with any excess charged at market rates to reflect the actual supply and the cost of providing it. This would be hugely unpopular with homeowners who have big lawns as well as with farmers. And perhaps the fabulous array of California produce would be reduced. But that seems like a reasonable price to pay for keeping California's reservoirs from running dry.

  1. Basically, this was headline writers garbling a report that suggested California only had a year's worth of water in storage. So yes, if not one drop of precipitation fell in California, the state would run out of water next year. But while California's weather is currently abnormally dry, it's not the Sahara. It will get more rain and snow, and it will not run out of water in a year -- though, of course, that doesn't mean it doesn't have a serious problem that needs to be addressed.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net