In celebration of Earth Day 2010, I am dedicating this post to … money. Or, more accurately, economics and how the “dismal science” is used in conversations about water resources. I think it is useful to understand the ways in which economics is used, because it helps to draw out connections between water management techniques that might not be apparent otherwise. Note that I am not writing here about different movements within economics (although that might be interesting at another time), but about the use of economics and economic concepts in water resources management. This post describes three primary uses of economics, although these are undoubtedly too few, too broad and too narrow. My observations are certainly not unique, and many of you have thought about these categories before. I would love to hear your comments below.
The first use of economics falls into the category I will call Economic Traditionalism. In this category, economics is used to determine the cost of supplying and distributing clean drinking water and wastewater treatment, and those costs are allocated among water users on a roughly equal basis. Under Traditionalism, water management takes economics into account by calculating the life-cycle costs of alternative actions and choosing the lowest cost alternative. This use of economics does not consider any externalities other than those that are mandated by law. Historically, Traditionalism has been the dominant use of economics by water utilities, especially government-owned utilities, and federal and state government programs. For many government programs, Traditionalism has been mandated through rules requiring economic feasibility studies (see the federal reclamation program), rates that are directly proportional to the costs of providing water service (see the California Constitution, Article XIIID) and low-bid procurement methods. Oftentimes, Traditionalism is applied by political leaders seeking to minimize water and wastewater utility rates.
The second use of economics I will call Economic Liberalism. This movement uses economics in a more active way, seeking to use financial incentives to drive individual and collective behavior toward rational resource allocation. Liberalism favors the use of well-designed markets to allocate water resources efficiently, decentralizes decision-making to individual water users, prices water at full cost to industry, agriculture and individual consumers, and encourages water transfers that appropriately internalize third-party costs. Liberalism is not afraid to change the rules of water management in order to achieve better markets and incentives (while respecting investments and property rights) and does not inherently protect existing institutions. This movement favors technological innovation to achieve water quality goals, but does not subsidize or mandate specific technologies, rather letting the market determine which should survive and thrive. It is neutral on public versus private ownership of utilities, as long as the outcome is the most economically efficient under the circumstances.
Lastly, there is an increasingly vocal movement I will call Progressivism. Under this movement, the use of economics in water management is rejected as being a tool of capitalistic, exploitative industry and a materialistic, bourgeois society. Progressives support the control of water resources by the government as an ideological matter, regardless of efficiency. For a Progressive, water should be allocated and delivered to users by government agencies free of charge, or at rates that are scaled based on ability to pay or other social factors. Environmental protection should be strictly and legally mandated for all water users and paid for at the government level through taxation. Progressivism rejects water transfers as allowing the enrichment of individuals based on water that is a public good and should not be reduced to private property in any sense. Much of the anti-private water and anti-bottled water campaigns are underlain by Progressive ideas.
Personally, I find Economic Liberalism the most useful, efficient and fair method of water resource management. Next time you hear public policy arguments on water resources, ask yourself what use, if any, is being made of economics, and is that the best use of economic analysis?
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