Water, Water Everywhere, But Can We Drink It?
Solving the Blue Planet's Water Problems of Overuse and Abuse

Terry Anderson and Donald R. Wentworth

Serious problems of water use exist in all countries. This situation is ironic since water is both a precious resource, required to sustain life, and an abundant resource. This article deals with problems of water scarcity. It examines the use and abuse of water, suggests policies to correct water-use problems, and provides four teaching ideas to help students understand the environmental consequences of water policies.
Unintended Consequences
Environmental problems associated with water use are rarely caused by deliberate abuse. Instead, problems often arise as a result of people's efforts to be rational consumers and producers of water in a situation in which there are few incentives for water conservation. Consider the following case of the Kesterson National Wildlife Refuge.
For several years the U.S. Fish and Wildlife Service (USWFS), manager of the Kesterson National Wildlife Refuge in central California, was happy to take the inflow from the San Luis Drain, which constituted the main source of water for the refuge. Then in 1983 the USWFS noticed something seriously wrong: the once-productive refuge was turning into a grotesque sideshow of deformed fish, birds, and reptiles. Wings were missing, heads were not completely formed, beaks were misshapen, and animals were dying. Instead of being a wildlife refuge, Kesterson was more like a toxic waste site.

Studies showed that the toxic culprit was selenium, a trace element being leached out of soils by Bureau of Reclamation irrigation water in the state's Westlands Water district and carried to Kesterson via the San Luis Drain. Because farmers in the water district pay only about 15 percent of the cost of storing and delivering water, and because the drainage system was also heavily subsidized by the federal government, farmers had an incentive to use large amounts of water to irrigate marginal lands, with little regard for the quality of wastewater. In the process, extensive irrigation leached the selenium and other trace elements from the soil and deposited them in the drain. In small dosages selenium is necessary for life, but as it concentrated in the Kesterson Reservoir, it became a deadly pollutant.1

Problems like the one in the Kesterson National Wildlife Refuge are difficult to prevent, hard to correct, and frustrating to all parties concerned. What is hard for many people to understand is why the problem occurred in the first place. Earth is the "Blue Planet." Three-fourths of the earth's surface is covered with water. The amount used by humans is approximately one percent of total world precipitation (Rogers 1993). How can such an abundant resource, a resource so underused, be so scarce? The problem is that while the Blue Planet has more than enough water to meet human demands, water is often found in the wrong place at the wrong time.

How do people typically deal with this problem? One response is ground water mining, tapping underground sources. The famous Ogallala aquifer in the south-central United States-the world's largest groundwater basin, covering 174,000 square miles-is feeling the pressure of pumping. Withdrawals from the Ogallala irrigate 15 million acres and account for 30 percent of total U.S. groundwater used for irrigation. Overdraft (withdrawals in excess of recharge) occurred in 95 percent of the Ogallala, sparking forecasts that the aquifer would be 23 percent depleted by 2020.2 The water tables beneath Dallas-Fort Worth have dropped 492 feet since 1960. A similar situation exists in Arizona, where water tables around Phoenix have dropped 400 feet in the past 50 years.3

Overdrafting with groundwater mining is not a problem if the value of the water in its current uses is greater than any future value it might have if left stored in aquifers. Everyone overdrafts on warm days when we are thirsty and drinking from a container. In that situation, we value that water more for current use than for future use. But overdrafting becomes a problem when a policy of open access to the water encourages over-pumping. To understand this problem, envision several thirsty children with a single soda and several straws. Each person might like to drink leisurely, but each person knows that he or she can garner more by drinking more rapidly than the others. There is a disincentive to conserve (someone else will drink your share of the soda you conserved) and an incentive to drink (to get your share before someone else does). Therefore, the soda is quickly depleted.

Water quality is another serious environmental problem. Half of the world's population is estimated to suffer from infections caused by waterborne diseases such as yellow fever, malaria and river blindness.4 Diseases associated with water kill 5 million people per year,5 and four of five child deaths in developing countries result from waterborne disease.6 These diseases are highly correlated with income. The 25 percent of the world's population that enjoys centralized water and sewer systems avoids most waterborne diseases. Such diseases are more prevalent in developing countries, however, where 95 percent of the people discharge untreated sewage directly into surface water. In 1970, only 29 percent of the population in lesser developed countries had access to safe drinking water, and by 1980 this had risen only to 43 percent.7

The Environmental Impact of Water Prices
Most water is provided to users by large storage projects created and built by national governments. In the United States, it was the New Deal that got the ball rolling. Under the Tennessee Valley Authority, the Public Works Administration, and the Columbia Basin Project, the federal government built hundreds of dams for flood control, irrigation, and hydropower production.
Subsidized financing of water projects is typical throughout the world. Since most of these projects are irrigation systems, the lion's share of the subsidies goes to farmers. 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.8 Water prices on government irrigation projects in South Africa average only 30 percent of operating and maintenance costs.9

But what is the harm in providing below-cost water? Does it not make sense that such a precious commodity be made available to farmers and city people at low prices so that everyone can use it to provide food, cleanliness, and thirst-quenching services? Actually, low prices do cause harm to the environment and decrease the availability of water to large groups of people. Artificially low water prices provide no incentive for people to use the resource wisely. Typically, irrigation projects are less than 50 percent efficient, meaning that much of the water diverted for crops runs off, carrying with it pesticides, herbicides, and soil nutrients. Water logging also occurs as farmers apply generous amounts of cheap water to their crops. As a result, it is estimated that 150 million hectares-60 percent of the world's total irrigated area-need some form of upgrade to remain productive.10 With cheap water, farmers also tend to concentrate on high-valued, water-intensive crops like sugarcane, alfalfa, and fruits.

Inefficient water use is not confined to agriculture. Urban residents, too, usually do not pay the full cost of the water they use. Hence, green lawns cover desert cities, faucets drip continuously, and antiquated distribution systems leak badly. Boston's delivery system lost nearly one-third of what was put into it until a leak detection program reduced losses to 12 percent between 1978 and 1983.11 On average, public water supplies in the United Kingdom leak 30 percent of their water.

Proposals to raise water prices to cover the true cost of water are sometimes misrepresented as proposals that would deprive people with low incomes of the water that they need. It would certainly be undesirable for the price of water to be so high that people with low incomes were unable to obtain the water they needed to drink or use for cooking and cleanliness. Problems of this kind can be addressed relatively easily through the distribution of vouchers allowing people of low income to purchase water to meet their needs if the price of water is raised to cover its true cost. Most overuse of water is caused not by the poor, but by people who can reasonably be expected to pay the real price of water, and do not need to be subsidized by the taxpayer. This is exactly the kind of problem best addressed by a market system.

Solution 1: Create environmentally friendly water prices.
The role of prices is often misunderstood. Many people consider high prices only as a burden to consumers, with no redeeming social value-merely a financial barrier to keep lower- and moderate-income people from enjoying that high-priced item. In practice, prices do more than restrict the life styles of moderate- and low-income people. Prices serve as incentives to producers to increase or decrease production. They also serve as signals to convey the relative value of different items. People treat high-priced items as precious, highly valued commodities while treating low-priced commodities in a more wasteful manner, because they are more abundant and less expensive to replace.
What would happen if water prices more closely reflected the actual costs of providing water to customers? Would consumers and suppliers respond to changes in water prices? Many people believe that water is a necessity and that people can not or will not change their use of water no matter how the price changes. Evidence suggests otherwise.

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, using a combination of water price increases and other forms of rationing. In their study of six subregions of the United States, economists Beattie and Foster found that a 10 percent increase in the price of water would reduce water consumption between 3.75 percent and 12.63 percent.12 As might be expected, because high variability in precipitation influences water use, the northern California-Pacific Northwest region was the most responsive to higher water prices and the arid southwest region the least responsive.

Similar evidence for the agricultural sector, which generally consumes 80 to 90 percent of all water used, suggests that this demand is also price-responsive. Demand responsiveness varies by crop, but some aggregate estimates by agricultural economist Del Gardner for California show that a 10 percent increase in price would bring about a 6.5 percent decrease in water consumption. When water costs farmers more, they use less on any particular crop, they shift to different irrigation technology, and they change cropping patterns. A simulation of a 640-acre farm in Yolo County, California, 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 and safflower acreage (requiring less water) would expand. Many choices are available to water users; they can adjust to changes in water prices.

By motivating farmers to cut their consumption through improved irrigation techniques and modified cropping patterns, higher water prices would free up irrigation water for municipal and other uses. Transferring just 5 percent of agricultural water to municipal uses would meet the needs of urban areas in the western United States for the next 25 years.13 Higher water prices would also reduce the need for supply projects and delivery systems that cause environmental harm through damming and diverting free-flowing streams. Higher prices would encourage private firms to enter the water-supply industry, taking the burden off the public treasury. If markets in water were permitted, demand would be reduced, supply would be increased, water would be reallocated, and the specter of water crises might vanish. Ironic, is it not, that higher prices can be environmentally friendly?

Solution 2: Creating Environmentally Friendly Water Ownership
Institutions can be created which provide the incentive to conserve water and avoid its misuse. There is historical precedent for such institutions. Indian tribes living in the arid Southwest were among the early civilizations to recognize the link between incentives and efficient use. Although they built dams and canals collectively to divert and deliver water, the water delivered to the privately owned fields was also privately owned.14 Similarly, indigenous Hawaiians defined private water rights on the basis of taro production. Modern strategies to improve water use in cities often involves privatization of municipal water systems. For example, in Buenos Aires, more than half the city's water used to leak out of the pipes, and shortages occurred every summer. The state-owned firm that distributed water was inefficient and over-staffed. Since 1992, a private consortium led by Lyonnaise des Eaux has been pushing water through the pipes of Argentina's capital. Last year it showed a profit of $52 million, while lowering prices to consumers. How did it happen? The consortium cut the staff by half, installed new meters for industrial users, and repaired thousands of kilometers of leaking pipes. Employees were allocated 10 percent of the shares in the consortium, which gave them a stake in the business. Profits were reinvested in the company, facilities expanded, and more customers were connected. In 1994, Buenos Aires had no water shortages during peak demand periods.
Markets can promote water-use efficiency. California, Colorado, and Montana have passed legislation allowing farmers to retain their rights to water they conserve. Therefore, buyers can purchase water (that would otherwise be diverted for irrigation) from the farmers and dedicate it to instream uses. Similarly, the Nature Conservancy has been particularly active in Colorado in obtaining conservation easements on irrigation water, allowing the water to be left in the stream without being jeopardized by the "Use it or Lose It" principle.

To solve the problem of groundwater overdraft caused by situations of overuse of cheap, commonly available water, even more innovative solutions are needed. Unfortunately, defining groundwater rights is more difficult because recharge and discharge are hard to measure. Nonetheless, it is possible to define rights to stocks and flows and to adjust those rights as more information becomes available regarding the constraints of the aquifer.15 Because groundwater and oil have similar characteristics, it would also be possible to develop a system of groundwater rights based on the idea of oil pool utilization. This system gives all owners in the pool a voice and a stake in the rate at which the resource is extracted and therefore reduces the chances of "the race to the pumphouse" found with the rule of capture.

Pollution problems could also be reduced with more reliance on property rights. In England, where many fishing rights are privately owned, the owners have an incentive to police water quality, identify polluters, and seek redress when pollution adversely affects fisheries. Through the Anglers Cooperative Association, hundreds of legal actions have been taken against polluters and injunctions or damages have been obtained for municipal waste, industrial contaminants, and agricultural pollution.

The Blue Planet will able to provide the water required for humans to live on Earth for the foreseeable future. It has an abundance of water. But unless different techniques are used to alter water mining and consumption, many places on Earth will experience water shortages and poor water quality. The market process with its reliance on property rights, private ownership, and variable prices can help prevent these problems. This article and the instructional lessons it suggests demonstrate how markets can encourage people to treat water as a precious resource, one that should not be wasted or fouled by careless acts or well-meaning but misdirected pricing poliscies.

Students may have a difficult time imagining how prices work to encourage people to take good care of a precious resource. Try this idea in class. After students have explained how each policy change would affect their use of textbooks, see if they can make the connection to water use.
Announce a new school policy. School textbooks will now be purchased by the school district at the end of each school year. All students will be allowed to return their books and be paid $5, $20, or $40 for each book. They will receive $40 if the book looks like new, has not been written in and is clean, $20 if it has been used but not written in, and $5 if it is dirty, written in, but still useable. Ask students how they would change their use of the textbooks.
Then announce a change in policy. The school board is worried that students will keep the books in storage and not use them to learn, so the board has changed the pricing policy. The school district will pay $5 for a perfectly clean book, $20 for a book that is clean and not written in, and $40 for a clean, well used book with study notes written in the margins. The $40 will be paid only if the margin notes are insightful and extensive. Ask students how they would change their use of the textbooks.
Answer: Most schools provide books at no charge to students and provide no cash for returned books; students thus tend to treat the books carelessly. They would keep the books much cleaner if they were paid for clean books and they would find ways to add good margin notes if they were paid for margin notes.
Ask the students to do a home survey. Explain that the city council is considering a new plan to sell water by the gallon. New prices are being considered. Those prices are $.01 per gallon, $10 per gallon, and $100 per gallon. Students should ask their parents how family members would change their use of water to adjust to these prices. Include these water use examples: 1. Showers/baths, 2. Car washing, 3. Drinking water/cooking water, 4. Toilet flushes, 5. Watering flowers, plants, gardens and lawns.
Answer: Students and their parents will cut back on both the amount of water used per activity and the number of different uses as the price moves from $.01 to $100 per gallon. No one likes to pay higher prices, and consumers do alter their behavior as prices change. They do not keep using the same amount of water as the price increases.
Bring to class a bag of candy such as Ms or Hershey's Kisses. Tell the students to pass the bag around the room and take what they what. Do not set any rules. The bag will probably be emptied before it gets around the room. Ask students why it was depleted so quickly: some people did not get any candy although there was enough candy for everyone to begin with. Then ask students how they would treat the candy if they owned it.
Answer: They would control its use and use it in their interest. For example, they would allocate the candy so everyone got a share, or they might decide to save some candy for future use. People take better care of things they own.
Then show the students a visual with the following questions on it and ask them to discuss possible answers.
1. Which is cleaner: your school's corridors or your living room? Why?
A free-wheeling conversation may ensue, but one important point should arise. People litter because it reduces their waste-disposal costs-although it imposes costs on others. If you own the property, littering imposes the waste-disposal cost on you, and you are less likely to do it. Most homeowners will pick up litter in their living room. Fewer people will pick up litter in the school corridors.
2. Which stuff that you own do you take very good care of? Which stuff that you own do you not take such good care of? Why?
This question invites discussion about ownership and the idea that some things are more important than others. People take better care of the things they value or things they have that other people value. For example, a student may own a bicycle and a tricycle. The student may not care much about the tricycle because he or she no longer uses it. The bike is more important and the student takes better care of it. However, if the student could sell the tricycle for an attractive price then he or she would take very good care of it also.
3. How does the way you clean your room differ from the way your mom or dad cleans your room?

This question invites further consideration of points made in discussion of question 2. Young people's rooms may be messy because they value order and cleanness less than adults do. Nevertheless, they do value the stuff in their room. The stuff in their room belongs to them, while the things in the rest of the house belong to their parents. When parents clean the room, the parents may move or throw out the child's precious possessions. In this case the parents do not take care of these items as well as the child would. As one young person said, "Mom, you didn't clean my room, you strip-mined it!"
Ask the students to reconsider the situation described in Teaching Idea 2. What would happen if people were allowed to use up to 100 gallons of water per week? They will be charged $1 per gallon whether they use the water or not, so the total cost of water per week is $100 to anyone on the water line. But consumers also are allowed to sell any or all of the 100 gallons of their water allowance. How would they choose to use the water if they could sell it for $.10, $10, or $100 per gallon? How does this behavior compare to that of a farmer with the opportunity to use the water on his or her land for irrigation or sell it to environmentalists who want to keep the water in the river?
Answer: Students should realize that at $.10 per gallon, little incentive exists to save and sell the water. At $10 and $100 per gallon people would dramatically conserve their water use in order to reap the benefits of extra income by selling the water. This situation is very much like that of a farmer who will choose to use the water more carefully if there is a good income to be earned by selling unused water.

1. For a complete discussion, see Richard W. Wahl, Markets of Federal Water (Washington, DC: Resource for the Future, 1989): chapter 7.
2. Jean Margat, "A Hidden Asset," UNESCO Courier, 15 (4), 1993: 15.
3. Conservation Foundation, State of the Environment: A View Toward the Nineties (Washington, DC: The Conservation Foundation, 1987).
4. Robin Clarke, Water: The International Crisis (Cambridge, MA: MIT Press, 1993).
5. "The First Commodity," Economist, 322 (1992): 11.
6. N. D. Jayal, "Destruction of Water Resources-The Most Critical Ecological Crises of East Asia," Ambio, 14 (2), 1985: 96.
7. M. B. Fiering, "Models for Assessment of Water Resources." In Resources and World Development, edited by D. J. McLaren and B. J. Skinner (New York: John Wiley & Sons, 1987).
8. Robert Repetto, Skimming the Water: Rent Seeking and the Performance of Public Irrigation Systems Report 4 (Washington, DC: World Resources Institute, 1986).
9. Department of Water Affairs, Management of the Water Resources of the Republic of South Africa (Cape Town: CTP Book Printers, 1986).
10. Sandra Postel, "Saving Water for Agriculture," State of the World: A Worldwatch Institute Report on Progress Toward a Sustainable Society, Project Director, Lester R. Brown (New York: W. W. Norton, 1990).
11. Peter Rogers, America's Water: Federal Roles and Responsibilities (Cambridge, MA: MIT Press, 1993).
12. Bruce R. Beattie and Henry S. Foster, Jr., "Can Prices Tame the Inflationary Tiger?" Journal of the American Water Works Association, 72 (1980): 444-445.
13. Leslie Spencer, "Water: The West's Most Misallocated Resource." Forbes (April 27, 1992): 68-74.
14. Terry L. Anderson, Sovereign Nations or Reservations? An Economic History of American Indians (San Francisco: Pacific Research Institute, 1995).
15. Terry L. Anderson, Oscar R. Burt, and David T. Fractor, "Privatizing Ground Water Basis: A Model and Its Application." Water Rights: Scarce Resource Allocation, Bureaucracy, and the Environment, edited by Terry L. Anderson (San Francisco: Pacific Research Institute, 1983).

Terry Anderson is Professor of Economics at Montana State University. Donald R. Wentworth is Professor of Economics at Pacific Lutheran University, Tacoma, Washington.