The water shortage myth

We have been told for months that there is a water shortage in California. However, I have always contended that the price of water is too cheap in California; the price is set by municipal water districts. Because water is so inexpensive, any calls by state officials to conserve go unheeded. Residents simply do not have the incentives to really conserve. And like I always say--incentives always matter. A recent article at Forbes summed up the situation and a solution rather nicely:

California is perpetually portrayed as suffering from a shortage of water. Case in point: Gov. Arnold Schwarzenegger recently declared a statewide drought, telling citizens to prepare for rationing. But the state's problems are not a result of too little water.

The real problem is that the price of water in California, as in most of America, has virtually nothing to do with supply and demand. Although water is distributed by public and private monopolies that could easily charge high prices, municipalities and regulators set prices that are as low as possible. Underpriced water sends the wrong signal to the people using it: It tells them not to worry about how much they use.