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- Law of demand
Standard 4: People respond predictably to positive and negative incentives.
Standard 8: Prices send signals and provide incentives to buyers and sellers. When supply or demand changes, market prices adjust, affecting incentives.
Students consider different patterns of water use, calculate their own families’ monthly usage, and compare it to usage by a fictitious average family. Then consider why different people use different amounts of water and how their use might be reduced. In the process, students discover the important connection between the amount of water we think we need and the price we pay for it.
One obstacle to thinking clearly about water use arises from the prevalent assumption that water is somehow different from other resources. According to this view, water is unique because we need water, and our use of water is therefore a right. Consequently, we tend to use water as if it were unlimited, when it clearly is not. In studying water resources, it is best to confront these underlying assumptions at the outset, asking: What does it mean to say that we need water? How much water do we need? Is water fundamentally different from other resources?
Economic reasoning and empirical observation tell us that our “need” for water depends:
- It depends on our circumstances or situation;
- it depends on our personal interests, values, and tastes; and
- it depends on the price of water.
In fact, the average American uses about 75 gallons of water per day, even though the estimated humanitarian need for water (sanitation, cooking, and cleaning) is only about 13 gallons per day per person. (http://www.epa.gov/OW-OWM.html/cwfinance/cwsrf/consrvprice.pdf) Once students acknowledge that people have many and varied uses for water and that only one of those uses— the very small amount of water that replenishes bodily fluids —is both universal and irreplaceable, they are ready to address the question of how people decide how much water to use and to analyze proposals for reducing water use in situations where that is desirable. In the process of analysis, students will find that many water-use issues can be successfully addressed without resorting to calling other people’s water use “stupid,” or branding their actions “immoral.” Economic reasoning tools help students understand the logic of people’s choices as they consider questions like:
- Why do farmers grow rice in the California desert?
- Why don’t people care enough about water to turn off the faucet when they brush their teeth?
- If we have a water shortage, why does the city water the median-strip gardens on the streets in our town?
We tend to think of water as being different from other resources, but in the real world, people’s desire for and use of water is similar to other goods, services, and resources, in that it changes in response to the price they pay for it. Far from being held hostage by their vital need for water, people prove themselves to be very adaptable, finding many substitutes and ways to use more or less water as the price changes.
The evidence is strong that both urban and agricultural water users change their behavior in response to changing prices:
- Economists Olmstead and Stavins (2007, pp. 4) compared numerous water studies throughout the United States and found that a ten percent increase in the price of water resulted in an average decrease in water consumption of about three to four percent.
- California was able to reduce the demand for water by more than 20 percent during a drought period from 1987 to 1992 by implementing price increases (Olmstead and Stavins 2007, pp. 16).
- The Environmental Protection Agency estimates that residential water consumers will reduce water consumption by 2 to 4 percent for a 10 percent increase in price. Industrial users will have a greater response — closer to a 5 to 8 percent reduction for a 10 percent increase in price (www.epa.gov/OW-OWM.html/cwfinance/cwsrf/conservprice.pdf).
- From 1985 to 1995, the price of water delivered to farmers in California’s Westlands Water District rose from an average of $16.25 per acre-foot to $58.11. This was also a period when water supplies to the district fell because of a drought and environmental regulations. Farmers responded by fallowing all but their best lands, growing crops that yielded higher returns, and installing drip irrigation systems. Low-paying crops such as safflower, barley, field corn, rice, and sorghum disappeared in favor of fruits and vegetables such as tomatoes, lettuce, garlic, onions, asparagus, melons, sweet corn, grapes, and almonds (Anderson & Snyder, 1997; Clemings 1996; Westlands Water District, 1994).
- “A comprehensive analysis of agricultural water demand studies conducted between 1963 and 2004 found that on average, a 10 percent increase in the price of water would reduce demand by nearly 5 percent (Scarborough and Watson, forthcoming).”
Prices also help people recognize that not all uses of water require water of the same quality. For example, a residential building boom in Utah caused water prices to increase drastically—and people responded with practical ingenuity. Shares of water rights held by ditch companies sold for as much as $3,200 per unit, a fourfold increase since early 1993. The high cost of water led some towns to install two pipelines to each home, one carrying drinking water, the other untreated water for lawns and gardens (Anderson & Snyder, 1997; U.S. Water News, 1994).
Choices as mundane as switching brands at the grocery store when an old favorite becomes too expensive, or buying a compact car when gas prices rise, rarely merit attention. The price changes and our use changes accordingly. Switching from a hose running in the driveway to a car wash that recycles water, or installing a low-flush toilet, or lining irrigation canals—these are actions analogous to those in the grocery store and car examples. Why, then, are these water-related choices often made in response to regulation and law rather than through individual choice? The answer is revealed when we look at the price of water. Throughout the United States, water is priced as if it were not very scarce; it’s no wonder people use it as if it will never run out.
As students identify the ways in which they could change their lives to adapt to the availability of water, they’ll find that they, too, possess the ingenuity to figure out how a basketball or a coal mine can be a substitute for water.