download EWE Lesson 2 (.doc file)
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 learn that the value of water is subjective – determined by its perceived availability and people’s individual interests in any specific situation, rather than by some absolute standard or physical measurement. In the process, they recognize that their judgments about whether others are “wasting water” are also subjective, and result from imposing their own values on other people’s choices and actions.
If water is necessary for life, why are diamonds more valuable? Water is cheap and diamonds are expensive even though we know that water is scarce. We could live without diamonds, but not without water; yet we use water as if it weren’t valuable. Drought, water shortages, and water rationing are recurring news stories. Still, we act as if we had an endless supply, running water down the drain while we brush our teeth or down the gutter when we clean the driveway. Why is that? Economists call this the diamond-water paradox.
It would be easy to lay the blame on greed or thoughtlessness, but blaming “bad” people has (at best) limited usefulness. And surely, we all know people who are neither greedy nor thoughtless who use water with little apparent concern that it will run out. This lesson suggests that we can learn more by examining the institutions our society uses to allocate water than we can by pointing fingers at others’ “wasteful” practices.
When it comes to water use, price and availability are the key considerations. How easy is it for us to get water? What do we have to give up to get it? For most of us, not very much, especially not in comparison to what we must give up to get a diamond. How hard is it for us to get more water? Again, for most of us, it’s not very hard. When was the last time you turned on the faucet and no water came out? As long as the price is low and water is easily available, we will use water in ways others might think wasteful. When price and availability change, our use will change.
Anyone who has hiked or backpacked in a hot environment knows how carefully hikers use the water in their canteens, and television news reports remind us how valuable water is to people caught up in natural disasters. But students may not realize that our everyday use of water is guided by the same principles as those involved in extreme or extraordinary circumstances. The ship-wrecked sailor and the backyard gardener both use water in response to their judgment about how much water is readily available and how much they must pay in time, effort, or money to get it. This is another way of saying that, from their own points of view, people use water rationally. As students participate in Lesson 2, they learn that:
- people usually have good reasons (even if they aren’t your reasons) for the ways in which they choose to use water; and
- in order to change the way people use water, we must change the incentives they face.
As more American cities search for ways to avoid future water shortages, they find that if they give signals to show that water is precious, people respond by using less. One of the most effective signals is price; we have much evidence that changing the price of water changes the amount of water people use. As we know from our study of markets, at higher prices, people use less of a given commodity and search for alternative means of achieving their ends. Water is no exception.
Evidence that city residents react to changes in the price of water is found all around the United States. For example, Tucson, Arizona was able to reduce average daily demand for water by 27 percent in 1977, by adding price increases to their water rationing system. (Anderson & Wentworth, 1997, p. 338) Changing the price of water has proven to be more effective at impacting water consumption than other, non-price mechanisms such as rationing, outdoor water bans, or requiring particular technologies like low-flow faucets and toilets.
“The gains from using prices as an incentive for conservation come from allowing households to respond to increased water prices in the manner of their choice. . . .Some households would be expected to plant fewer green lawns or install front-loading clothes washing machines, for example, in areas where water prices are relatively high (Olmstead and Stavins, 2007, p. 5).”
Using price to impact behavior is not only more effective than non-price programs, but also has lower costs to monitor and enforce.
“Where water savings have been estimated from non-price approaches, they are usually smaller than expected, due to behavioral responses. For example, they may take longer showers with low-flow shower heads, flush twice with low-flow toilets, and water longer under day-of-the-week or time-of-the-day restrictions.
. . . In a study of 85 urban water utilities in California during a prolonged drought in the 1990s, more than half of customers violated quantity-of-use restrictions, where these were implemented, and compliance with type-of-use restrictions were also very low. . . .
A recent study of 12 cities in the United States and Canada suggests that replacing two-day-per-week outdoor watering restrictions with drought pricing could achieve the same level of aggregate water savings, along with welfare gains of approximately $81 per household per summer drought (Olmstead and Stavins, 2007, p. 4-5)”
Research has also demonstrated the responsiveness of agriculture to changing water prices, which is an important finding, given that 80-90% of all water consumption involves agriculture. Agricultural economist Del Gardner found that:
“ . . . a 10 percent increase in the price [of water] would cause an overall average consumption decrease of 3.7 percent for the seventeen western states. Gardner estimates that…a 10 percent increase in price would yield a 20 percent decrease in water use in California.
. . . [I]f water costs more, farmers will use less on any particular crop; they will shift to different irrigation technology or water application practices; and they will change cropping patterns. . . . Flood irrigation techniques conserve on labor but use large amounts of cheap water. With higher water prices, it makes sense to substitute labor and capital for water and to use drip irrigation or similar techniques. In a simulation of a 640-acre farm in Yolo County, California, Hedges showed that the optimal cropping pattern at a zero water price would call for 150 acres each of tomatoes, sugar beets, and wheat; 47 acres of alfalfa, 65 acres of beans; and 38 acres of safflower. If the water price rose to $13.50 per acre-foot, water-intensive alfalfa acreage would drop out and safflower acreage, [which requires] less water, would expand. “(Bailey, 1995, pp. 283-284)
Students might reasonably ask, “If farmers can make changes in order to use less water (or if we can turn off the faucet when brushing our teeth), why don’t they?” Here it is easy to say that water users “don’t care.” But this misses the point: the choice in each case involves a cost—in time, money, or (as in the case of brushing teeth) inconvenience.
“The water utility industry has done a good job for consumers. Unfortunately, because of this good job, water users have adjusted their way of life so that needs of water are great…thus, how much water consumers need depends not only on willingness and ability to pay, but most importantly on the real price charged. If it is a lot, only a modest amount of water is needed. If the charge is a little, a lot is needed. (Anderson & Wentworth, 1997, p. 338.)”
Unfortunately, only rarely today does the current price of water reflect its scarcity. The traditional pricing method for most municipalities and much irrigation water is known as cost-based pricing.
“This pricing method quantifies the costs of capture, treatment and conveyance. As such, this method can often obscure the larger but less quantifiable societal interests in preserving our water resources.” http://www.epa.gov/OW-OWM.html/cwfinance/cwsrf/consrvprice.pdf
“Most Americans pay less for water than they do for cable television or cell phone service. Water is ridiculously cheap in the United States. Nationwide, Americans pay an average $2.50 per 1,000 gallons; that’s $0.0025 per gallon, or four gallons for a penny. . . . It costs the typical American family approximately $20 per month for water (Glennon 2009, 223).
While many municipalities charge a constant price per unit of water used, water utilities are increasingly beginning to charge higher fees for increased water use. This usually comes in the form of block pricing where the price for a set quantity of water is constant per unit, increasing (or sometimes decreasing) when quantity consumed exceeds the set threshold. But, even under block pricing, most water pricing is still cost-based.
Agricultural users also generally pay less than the actual value of water. Western water law allows many farmers to pump ground water or divert river water without ever paying for the water itself, and government projects provide water to farmers at well below cost. “The U.S. farmer, for example, typically pays only one-fifth of the true cost of irrigation from federal projects. The situation is much the same throughout the rest of the world, where revenues collected from farmers barely cover 10-20 percent of the construction and operating costs.” (Social Education [October 1997], p. 338)
Cost-based pricing understates the value of water. Economic reasoning tells us that the full price of water includes not only the cost of water provision but also the opportunity cost; the value of alternative water uses. Pricing water at its real value would encourage water conservation and more efficient water use.
“Raising the price of water would encourage all users – homeowners, farmers, businesses, and industrial users – to examine carefully how they use water, for what purposes, and in what quantity. Economists agree that rate increases would encourage water users to eliminate marginal economic uses and use the water for more productive purposes. An increase in rates might stimulate new water-saving technologies and efforts to harvest water. Effluent water would become more attractive to potential users as the price of potable water rises (Glennon 2009, 226).”
Lesson Two helps students see that the way people use water depends—on the conditions in which they find themselves, on their interests and personal preferences, and most importantly on the price and availability of water. When people use something precious for ordinary purposes, they probably do so because the resource in question costs them little and they have no reason to believe it will be difficult to get more. Few of us really believe that turning off the water when we brush our teeth will save the planet, or even significantly reduce our water bills.