What Happens When You Abandon Prices As A Supply-Demand Matching Tool? California Tries Totalitarianism

Mostly, we use prices to match supply and demand. When supplies of some item are short, rising prices provide incentives for conservation and substitution, as well as the creation of creative new sources of supply.

When we abandon prices, often out of some sort of political opportunism, chaos usually results.

California, for example, has never had the political will to allow water prices to rise when water is short. They cite all kinds of awful things that would happen to people if water prices were higher, but then proceed instead with all sorts of authoritarian rationing initiatives that strike me as far worse than any downsides of higher prices.

In this particular drought, California has taken a page from Nazi Germany block watches to try to ration water

So, faced with apparent indifference to stern warnings from state leaders and media alarms, cities across California have encouraged residents to tattle on their neighbors for wasting water — and the residents have responded in droves. Sacramento, for instance, has received more than 6,000 reports of water waste this year, up twentyfold from last year...

Some drought-conscious Californians have turned not only to tattling, but also to an age-old strategy to persuade friends and neighbors to cut back: shaming. On Twitter, radio shows and elsewhere, Californians are indulging in such sports as shower-shaming (trying to embarrass a neighbor or relative who takes a leisurely wash), car-wash-shaming and lawn-shaming.

“Is washing the sidewalk with water a good idea in a drought @sfgov?” Sahand Mirzahossein, a 32-year-old management consultant, posted on Twitter, along with a picture of a San Francisco city employee cleaning the sidewalk with a hose. (He said he hoped a city official would respond to his post, but he never heard back.)

Drought-shaming may sound like a petty, vindictive strategy, and officials at water agencies all denied wanting to shame anyone, preferring to call it “education” or “competition.” But there are signs that pitting residents against one another can pay dividends.

All this to get, in the best case, a 10% savings. How much would water prices have to rise to cut demand 10% and avoid all this creepy Orwellian crap?

One of the features of Nazi and communist block watch systems was that certain people would instrumentalize the system to use it to pay back old grudges. The same thing is apparently happening in California

In Santa Cruz, dozens of complaints have come from just a few residents, who seem to be trying to use the city’s tight water restrictions to indulge old grudges.

“You get people who hate their neighbors and chronically report them in hopes they’ll be thrown in prison for wasting water,” said Eileen Cross, Santa Cruz’s water conservation manager. People claim water-waste innocence, she said, and ask: “Was that my neighbor? She’s been after me ever since I got that dog.”

Ms. Franzi said that in her Sacramento neighborhood, people were now looking askance at one another, wondering who reported them for wasting water.

“There’s a lot of suspiciousness,” Ms. Franzi said. “It’s a little uncomfortable at this point.” She pointed out that she and her husband have proudly replaced their green lawn with drought-resistant plants, and even cut back showers to once every few days.

Update:  Seriously, for those that are unclear -- this is the alternative to capitalism.  This is the Progressive alternative to markets.  Sure, bad things happen in a free society with free markets, but how can anyone believe that this is a better alternative?

  • Donald

    I often wonder what it would be like if Lex Luthor succeeded instead of Superman? Would california be better or worse off, assuming no loss of life of course!

  • Not Sure

    "Sure, bad things happen in a free society with free markets, but how can anyone believe that this is a better alternative?"
    You mean anyone other than a progressive, I presume. Progressives hate the idea that they'll ever be denied the opportunity to move people around at will like game pieces on a chess board. And, as described, capitalism denies that opportunity.

  • steamboatlion

    "how can anyone believe that this is a better alternative?"

    Because it's intentions that count in the mind of the average voter not outcomes.

  • dawn

    I've been a homeowner in San Diego since 1985. I recall a severe drought condition back in the 1990's in which the authorities sent out pleas for water conservation of 10 to 15 percent. The city residents responded with a cut in water usage of about 30%. Soon thereafter the water department and other local water utilities announced rate increases anyway because they weren't getting enough revenue because of voluntary conservation. While you can fool all of the people some of the time, you have to be pretty stupid to get fooled time after time on the same line.

    As for Sacramento, my brother lived there a couple of decades ago. He told me once that he didn't have a water meter at his house, he said nobody did. When I asked why, he said the city was at a junction of three rivers, there was plenty of water. I don't know if things have changed since then, but clearly unlimited water supply will generate sloppy demand. Maybe old habits are hard to break.

  • http://aguanomics.com/ David Zetland

    Good stories, and many people say the same. Utility finances often conflict with conservation messages. Sac, btw, is 50% metered now :)

  • http://aguanomics.com/ David Zetland

    No, this is NOT the alternative to capitalism, unless you include regulated monopolies in capitalism. You cannot get "market forces" with water utilities, but you CAN use prices to give people more choices. I've got 400+ posts tagged "raise prices" when it comes to water, but this hits on your exact topic: http://www.aguanomics.com/2014/06/one-simple-fix-for-californias-drought.html

  • Spruance

    "...that certain people would instrumentalize the system to use it to pay back old grudges." And not only grudges, I assume. Some will surely use is as a means for blackmail, selling exceptions and so on. Everybody who regulates has the power to legitimize exceptions, mostly for "social" reasons. And very soon you'll have a black market. This is the way hals of the Eastern Bloc economy "worked".

  • FelineCannonball

    California lets the free market control water auctions. At least this drought they have. Prices have gone up to 2000+ dollars per acre foot in many places. http://abcnews.go.com/US/wireStory/dry-california-water-fetching-record-prices-24384513

    More the problem are arcane rules around water rights, contracts, and priorities. Ground water is a free for all, pre-1914 surface-water users get everything they want, conserving water kills long-term rights, on a "normal water year" water is double booked, and there are innumerable hurdles to many types of transfers. This is more about letting convoluted contract law run amok than any top down control. The resource is frequently not fungible and some jurisdictions with excess water are incentivized to use it and disentivized or unable to sell it. In other words, some cities don't want their citizens to cut back too much because they don't want to see their allotment shrink.

    This year may see some changes. Pre-1914 users are starting to butt heads with eachother. There's more incentive than ever to make water fungible. And primary rights to ground water might be defined instead of left as a battle between well drillers and pump operators.

    But frankly there is a lot of friction from the people the system currently benefits.

  • Matthew Slyfield

    "How much would water prices have to rise to cut demand 10% and avoid all this creepy Orwellian crap?"

    You don't get it, the creepy Orwellian crap is the whole point. If they didn't have real water supply problems or let prices float then they would have to invent other excuses for the creepy Orwellian crap.

  • marque2

    California has done other things as well. It used to be that when we were asked to conserve we would reduce our water about it 25% without price controls - just for the good of humanity. We did it by flushing less, brick in the toilet, watering lawns less, wearing clothe twice, lowering the water flow in our showers, etc.

    But here is what went wrong - they forced us to get low flow toilets and showerheads and low flow sink faucets and HE washers and even had us put in low water landscaping and fake lawns - so we conserve as much as we can every year, even when water is abundant.

    So what do the water departments do with the water we saved during good years. Instead of selling only 80% of it knowing that the rest will be needed during down years and they only have it because we are conserving more - they sell it all and allow new development based on the rosey water allotments from good years - and they ignore the fact we can no longer cut back during the down cycle.

    This has little to do with the price of water and a lot to do with water mismanagement by government agencies.

  • marque2

    There is pretty much one agency which controls about 1/2 the non farm water use in CA the Los Angeles dept of water and power. One agency doing all the mismanagement.

    We also have problems with environmentalists stopping every new dam project for the last 35 years and yes the water sold in good years is double booked because about 20% is due to forced conservation efforts and DWP doesn't just sit on that saying well there might be a drought and we need 20% reserves - they immediately sell it and allow more water permits so next time there is a drought they can't provide and we the people can do little more to conserve.

  • marque2

    Something else to note, CA water prices are not exactly cheap. I stopped watering the back lawn during normal rain years about two years ago because they raised the prices so much - now with the drought - there is no way I can cut back on that lawn watering any more.

  • FelineCannonball

    Big wealthy cities and counties bought up rights a long time ago. They have also created a lot of new surface storage since the last drought. Diamond Valley Lake in Southern California. Enviro-Marin doubling its capacity in small reservoir projects. It's more constrained by potential diversions. They're currently talking about groundwater storage via wet year diversions, gray water diversions, stormwater capture.

    The people that are getting screwed are the little towns without money or planning in the drier surface-water free parts of the state. Economic battles more than wildlife diversions. 80 percent of the water used this year will be unregulated ground water and they aren't prepared to go there. Statewide 1914ers still trump wildlife diversions in all but a few special cases. They have no curtailment.

  • mesocyclone

    The neighbor nonsense on water isn't just in these systems. I used to live in an irrigated area of Phoenix (flood irrigation from foot diameter pipes in your yard). At some time of day (maybe 3AM - it varied), you had to turn on the huge valves in your yard. Then when your time was up, you had to turn them off. Unfortunately, the stand-pipe for the system was in my yard. This meant that if any neighbor didn't turn on their water, it ended up on my lawn, and ultimately flowing down the street from my yard.

    Somewhere down that street was a "neighbor" who was offended by that trickle of water in the street, and would always call the water police. Yes - Phoenix has water police. It's against the law to let water flow off of your property. So, I got lots of visits. They were not even slightly interested in the fact that I had no control over the water, and kept escalating their threats. I could have gone to jail over this!

    I finally solved the problem by visiting some city councilpersons and the mayor. I was (surprisingly) able to convince them that this was just wrong, and they should stop the water police from hassling me. It worked!

    Needless to say, in most encounters with this sort of bureaucracy, common sense and justice do not prevail.

  • Matthew Slyfield

    "California lets the free market control water auctions. At least this
    drought they have. Prices have gone up to 2000+ dollars per acre foot
    in many places."

    So some, but implicitly not all, Californians are finally paying the real cost of water provided by federal water projects that bring CA water from as far as two states away.

  • FelineCannonball

    Water is property. Those well positioned with senior rights essentially own the water as property and don't have to worry about the rest of the state. If they were positioned before the state projects, the project may just be a conveyance and they still own the water coming through it. On the other hand agriculture that started after the state project can be given a 0% allotment as they are this year. Municipalities are being given preference this year by the project, but its something like 40-55% of their presumed right. These towns are undoubtedly feeling it more than big cities which essentially own sufficient Sierran water. SF just cuts off some of the smaller communities it traditionally transfers water to and does fine with minimal additional use restrictions.

    The drought has some very disparate impacts.

  • Matthew Slyfield

    What drought? Half of the state of California (and the half with most of the population at that) is officially desert. The fact that the locally available water supplies are insufficient to provide water for even a 1/10th of the population does not a drought make.

  • John O.

    Exactly! The Central Valley has had practically all of its water diverted to the major cities of California to where if you're a farmer in California, you better be praying for rain all the time. So whats happened is that irrigation projects have stopped in order to supply the terrible municipal water systems that have no incentives to follow a proper pricing model for water deliveries.

  • John O.

    California is way behind on this, many of the cities in Arizona deserts already implemented plans to store water in aquifers and they went to great lengths in the 1980s and 1990s to buy the necessary land before it was turned into housing and other development to secure the water that exists underneath all of the now developed areas. This is reality catching up to state and local bureaucracies.

  • http://aguanomics.com/ David Zetland

    drought = below average preciptation

  • http://aguanomics.com/ David Zetland

    This is wrong in several ways. (1) Aggies still use most water (2) VERY LITTLE water is "diverted" to cities, but cities may have senior rights to smaller flows (3) muni water is sometimes priced right. Too many systems to generalize

  • http://aguanomics.com/ David Zetland

    I agree, mostly, but remember that "use rights" are not the same as ownership. Water is "Owned" by the People (see CA constitution, section X)

  • http://aguanomics.com/ David Zetland

    They are NOT paying the real cost of water as much as reallocating SOME of it based on marginal values (=keep trees alive)

  • http://aguanomics.com/ David Zetland

    Except AZ AMAs have many issues with taking water from one place and "offsetting" in another that's NOT hydraulically connected (but is legally)

  • http://aguanomics.com/ David Zetland

    This is false. DWP "controls" <20 percent of water, and maybe less. Metropolitan does control 2 MAF +/-, which is larger out of the 6MAF +/- that goes to M&I. That said, LADWP is a disaster: http://www.zocalopublicsquare.org/2014/03/14/if-clean-water-is-a-right-why-have-we-been-so-wrong/ideas/up-for-discussion/

  • marque2

    Yes and no. I believe 80% of water is still used by ag. However some 80 years ago Mulholland purchased/stole the water rights from the very agriculturally productive Owens valley. It is basically what allowed LA to grow so big.

  • marque2

    DWP provides most of the water in social for non ag use. Every time DWP decides to raise rates it increases our prices in San Diego - because they control most of our water and most of the water in LA, Orange and Ventura counties - which cover half the state population. The local water company dutifully sends us a notice describing the reason for the rate increase.

    Just because my water district isn't called DWP doesn't mean that they aren't beholden to DWP.

    Your link has nothing to do with the subject.

  • mahtso

    Mr. Zetland is correct re use rights, and this is part of the problem with calls to open the markets. Another part of the problem (in most western states) is that there are more "users" than there is water. So if the "first" user does not want the water, the second (or 90th) user gets to use it and, in effect, there is nothing for the first user to sell.

  • FelineCannonball

    It was a fuzzy analogy. Water rights involve ownership of a right to use that has all sorts of strings attached. California has a hybrid system with riparian rights and appropriative rights. Water rights can be bought and sold, but the details on what they give you are complicated. And then there's groundwater. Other water users (like those getting water through state and federal projects) without water rights get water based on contracts.

  • Matthew Slyfield

    We are talking about a desert here, by definition the average precipitation is very low.

    You could quadruple average rainfall in California and they still wouldn't have enough water locally for even half the existing population during the above average years. That's why the federal government spent huge amounts of money in the 1930s and 1940s to build massive projects to bring out of state water into California from as far away as Colorado.

    Even if there is technically a drought it isn't really relevant to CA's water problems.

  • JD

    In some cases the water is routinely used multiple times..ie in Sacramento (where I live) almost all in-house use is returned to the river for downstream and environmental reuse. Although, as part of the current wastewater treatment upgrades, special legislation was passed to allow Sacramento to retain wastewater to sell to local farmers (ECHO project). Absent such legislation many highly treated wastewater discharges are required to maintain flows to creeks/ rivers for other users (and the environment).....as the highest (approved) use....in many cases this drives the cost of treatment very high, compared with local reuse.

    Perhaps now we'll be asked to take longer showers or flush twice to allow them to sell more recycled water, Maybe we'll even be "shamed" into it by higher rates, if not enough is sold....although I'm not at all confident the money from sales will be used to mitigate sewer rate hikes in the first place. :)

  • SineWaveII

    Forget it Jake. It's Chinatown.

  • Brennan Schweitzer

    Old and Busted: Living your life as you see fit.
    The New Hotness: Tattling on your neighbors.