Plain Sense Economics

This article from The Economist describes a not-quite-a-market for agricultural water uses in California.

Farmers like Mr Errotabere have begun to use water more efficiently, dripping it through perforated hoses rather than flooding fields. There is a growing market in water trades between farmers. Most important, the state has set up a water bank. Farmers north of the Sacramento delta, many of whom grow rice, can offer to keep fallow their least productive lands and sell water to cities and needy farmers farther south.

As the excerpt notes, increasingly scarce water in California’s Central Valley is beginning to be reallocated using some market mechanisms. It isn’t a true market yet – the prices for selling and buying irrigation water is set by a state board. There is a glimmer of hope, though, that consumers of water will start paying something close to water’s value, rather than the historically subsidized fee.As the article points out, Federal and state efforts in the 1930s brought water to a fertile but arid part of California. Water has remained cheap to farmers, and so there was no incentive to use it sparingly. When we drive from Ashland down to the SF Bay Area we pass huge rice fields submerged in water, with what must be huge evaporation loss.

This story in progress points out how, when you want to ration a scarce resource, the best solution is to let the price of that resource reach a level on its own that clears the market, but leaves no surplus or shortage. Not only do we reach an economically efficient solution, but the consumers have an incentive to use the resource wisely.