Markets vs. drought: is parched California fertile ground for property rights and prices for water?

• Author: Bailey, Ronald
• Position: Columns

Reed Watson sees a silver lining in California's epic drought. "Only such an environmental crisis changes the law," says Watson, executive director of the Property and Environment Research Center (PERC) in Bozeman, Montana. "Only when a situation gets so severe do people begin to define property rights and turn to markets to solve environmental problems."

Make no mistake: The drought in California is dire. The current shortfall in precipitation has now lasted four years. The snowpack in the Sierra Nevada Mountains that supplies most of California's surface water is just 5 percent of the April 1 average.

As an emergency response to the situation, Democratic Gov. Jerry Brown has ordered the State Water Control Board to "impose restrictions to achieve a 25 percent reduction in potable urban water usage through February 28,2016."

Achieving such steep reductions will be a huge challenge. As it happens, the board reported in April that statewide water use fell by less than 3 percent in February, as compared to the 2013 baseline. To bring the total down more, Brown has empowered the agency to "bring enforcement actions against illegal diverters and those engaging in wasteful and unreasonable use of water." Water wasters in some cities could be fined up to $10,000 for breaking the rules.

"Too little, too late," says Watson. "A predictable byproduct of 20 years of water mis-management."

What about transferring water from agricultural uses to thirsty urban areas? After all, 80 percent of water in California not allocated to environmental uses goes to irrigate farms. Some rice farmers in northern California are reportedly considering selling their irrigation water to Los Angeles for $700 per acre-foot. An acre-foot--enough water to cover one acre to a depth of one foot--amounts to just under 326,000 gallons. At $700 per acre-foot, L.A. would be paying about two-tenths of a cent per gallon for that water.

A drought does not necessarily entail a water shortage. Droughts are caused by nature. Shortages exist when demand exceeds supply and markets are prevented from allocating a resource to its highest value use, usually because the price of the resource is held artificially low. So trades like the proposed water sales from farmers to Los Angeles can help alleviate shortages in drinking, hygienic, pool, and lawn sprinkling water.

Unfortunately, California has failed to develop institutions to handle water scarcity other than through political allocation...