Water is the common bond: agriculture, basic human needs, climate change, the environment

BBC News reports on the current drought in India, a complicated and challenging issue.

Following two consecutive bad monsoons, India is facing one of its worst droughts.

Of its 29 states, nearly half were reported to have suffered from severe water crisis this dry season…

The federal government in Delhi has had to send trains carrying water to the worst affected places.

India has faced a water crisis for years. Its ground waters have depleted to alarming levels, mainly because of unsustainable extraction for agriculture and industries.

In response to the drought, the government is planning to create several linkages between rivers so that water can more easily be distributed to locations most severely affected by the drought. The Water Resources Minister, Uma Bharti, also suggests some forward thinking regarding the project:

“The water crisis will be there [in the future] because of climate change but through this [inter linking of rivers] we will be able to help the people,” Ms Bharti said.

“The public has welcomed it and they are happily ready to be displaced.”

Are you keeping tracks of the costs and benefits of this project so far? Physical cost of actually implementing the linkages, benefit of addressing the current drought (e.g. water for direct human consumption and helping agriculture), benefit of being able to address future climate-change-related water crises, cost of displacing people to make the river linkages…anything else?

Environmentalists have opposed the project, arguing it will invite ecological disaster.

Diverting the water will certainly impact ecological systems. And there’s one final curveball mentioned:

“It is even more impossible in the context of climate change as you don’t know what will happen to the rivers’ flows,” says Himanshu Thakkar of the South Asia Network for Dams, Rivers and People.

“The project is based on the idea of diverting water from where it is surplus to dry areas but there has been no scientific study yet on which places have more water and which ones less.”

So apparently there is uncertainty about where exactly more water is needed now, where there is surplus water now, and how this will change in the future. Undoubtedly there is political pressure to address the problem sooner rather than later. Unfortunately, because the issue is extremely complicated and there is a lot that is unknown, a quality economic analysis of the problem would take a lot of time, time which certain people might not be willing to wait for. A difficult problem to address…

Saving the Natural Monopoly on Water

From the Texas Tribune: Witchita Falls, TX, along with other Texas cities, imposed an outdoor watering ban in order to conserve water during recent drought conditions. The result? Not enough revenue to cover the costs of operating and maintaining the city’s water infrastructure.

Even though the 100,000 residents of this northwest Texas city have substantially cut their water use, their dry lawns may no longer continue to save them money on their water bills. Instead, they will be asked to pay more; the city lost $4.5 million in water sales last year because of the conservation efforts.

Water utilities are what’s known as a natural monopoly in economics jargon.  This means that it’s more economically efficient to have a single provider of the good (here, water) than to have many providers of the good, which is normally more economically efficient. On the other hand, most people know that monopolies tend to charge high prices which lead to high profits and low consumer surplus (i.e. monopolies tend to be bad for consumers). Because of this problem, water utilities are regulated so that they cannot charge prices that are “too high” and thereby restricting their profits to be relatively small. Why is this? Because water is considered a necessity, so most policy-makers agree that everyone should have access to a reasonable amount of safe water.

When a drought occurs, a common policy is to implement a restriction on outdoor water usage because, of all uses of water by typical households, it’s considered the least necessary (relative to bathing, cooking, cleaning, etc.). In the case of Witchita Falls, the restriction resulted in insufficient revenue to support the water utility so it is now considering raising water rates.

Fort Worth’s goal, like that of many other cities in Texas, is to change its rate structure to avoid such ups and downs. Today, about 17 percent of the utility’s revenue comes from fixed monthly charges that all water customers pay regardless of how much they use; by 2018, Gugliuzza said, 25 percent of its revenue will come from such charges. Dockery said Wichita Falls is considering a similar transition.

Still, the changes will be hard to swallow politically. Consumers have underpaid for water for decades, said Sharlene Leurig, a program director at Ceres, a nonprofit sustainability advocacy group with which many Texas cities have consulted on water rate structures.

One pricing policy that is often suggested by economists but which isn’t always adopted is known as a two-tier pricing strategy. Under this strategy, all water consumers are guaranteed a certain amount of water for free or at a very low cost so that they can meet their basic human needs such as cooking and bathing.  Water consumed beyond that level is charged at a much higher rate (closer to or even above the true marginal cost of providing the water).  The idea is that this water is more likely to be used for less necessary purposes such as watering the lawn or washing the car. The water utility earns a profit on water consumed at the higher rate in order to make up for losses earned on providing water for basic human needs.