The Unintended Consequences of Water Pricing

I didn’t manage to catch all that much of the water panel, but I was struck by Israel’s Booky Oren, who said that 38 of the US states are coping with drought, but that if US agriculture used 50% reused water rather than drinking water, there would be no water problem in this country at all.

While there was of course talk of technological advances, especially on the desalination front, the main message seemed to be that simple is a better idea than complicated. Reuse waste water? Yes! Price water so that you encourage investment and discourage waste? Yes! Set up water futures contracts, or trust in technology to solve the world’s water problems? No.

That said, pricing water can have interesting and not necessarily intended effects. In Australia, for instance, water rights can be traded. When the country was hit by drought, the price of those rights rose, and wheat growers started selling their water rights to the vineyards, because doing so was more profitable than growing wheat. And that, in turn, contributed substantially to the rise in global wheat prices.

The world would be better off right now if Australia’s wheat growers had continued to grow wheat, and if Australia’s wine growers had simply produced less wine. But that’s not how the market incentives played out.

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