David Zetland of Leiden University College in the Netherlands and author of Living with Water Scarcity talks with EconTalk host Russ Roberts about the challenges of water management. Issues covered include the sustainability of water supplies, the affordability of water for the poor, the incentives water companies face, and the management of water systems in the poorest countries. Also discussed are the diamond and water paradox, campaigns to reduce water usage, and the role of prices in managing a water system.
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Readings and Links related to this podcast episode
Related Readings
HIDE READINGS
About this week's guest:
David Zetland's Home page
Aguanomics, David Zetland's Blog.
About ideas and people mentioned in this podcast episode:
Books:
Living with Water Scarcity, by David Zetland. PDF available without charge.
Articles:
"The West Needs a Water Market to Fight Drought," by Gary Libecap. The Wall Street Journal. October 2014. PERC.org.
"The California Water Crisis: Policing vs. Pricing?" by Kathryn Shelton and Richard B. McKenzie. Library of Economics and Liberty, September 1, 2014.
Marginalism, by Steven E. Rhoads. Concise Encyclopedia of Economics. Diamond-water paradox discussion.
Monopoly, by George Stigler. Concise Encyclopedia of Economics.
Adam Smith. Biography. Concise Encyclopedia of Economics.
Milton Friedman. Biography. Concise Encyclopedia of Economics.
Web Pages and Resources:
Metropolitan Water District of Southern California.
Aquifer. National Geographic.
Desalination. International Desalination Association (IDA).
Water Benchmarking. World Bank.
Dutch Water Sector. Vewin.nl.
Podcast Episodes, Videos, and Blog Entries:
Why it isn't Necessary to "Throw the Bums Out". Milton Friedman on getting bad people to do the right thing. Youtube video.
Munger on Many Things. EconTalk. January 2010.
Yandle on the Tragedy of the Commons and the Implications for Environmental Regulation. EconTalk. October 2007.
Terry Anderson on the Environment and Property Rights. EconTalk. August 2014.
Judith Curry on Climate Change . EconTalk. December 2013.
Highlights
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0:33
Intro. [Recording date: February 24, 2015.] Russ: Our topic for today is water, the stuff of life; and what economics has to say about it. We'll be talking about your book, Living with Water Scarcity, which is available without charge on the Internet. We'll put a link up to it. Many people argue that water is a right, a necessity, and no one should have to pay for it. What is your response to that? Guest: There's two responses to that. The first one is that--well, three, actually. The first one is that water might be a right, but getting the water to your house to your house or to your tap or to your field if you are a farmer, it's going to cost some money in terms of energy, infrastructure, and so on. The second response is that if water is a right--and for example, if you are going to give it away for free--then people are going to use a lot of water based on that price. And that might be a problem in terms of running out of water because demand is greater than supply. The third response, which comes up in the discussions of the human right to water is that just because you make it a right doesn't mean the government is going to deliver it. So, it seems to be a bit of a red herring; in fact, you call it a human right, because people get distracted with laws and rights instead of bigger, more important issues like water governance. Russ: And I think it's worth emphasizing here at the start that water, like many things--food or health that are "necessities" in some sense--how much we use of them, even though they are "necessities," if you want to stay alive--how much you use of them depends on usually what it costs you to get at them. And there's a lot of things that are--if you don't eat, you die. But the 9th ice cream sundae is not a necessity. Guest: Yeah; that's a great point. And it comes up all the time when people talk about, you know, you can't raise the price of water because people are not going to be able to afford it and they won't take showers, and so on. And, this was actually mentioned long ago in Adam Smith's book, when he talked, in The Wealth of Nations, he talked about the diamond-water paradox--the idea that water is extremely valuable but we sell it for cheap. And that paradox, so to speak, was resolved by the Marginal economists 100 years later when they said, Well yes, the first bits of water that you get are very, very valuable and you are willing to pay a lot; but once you already have a lot of water, then the price is quite low. And that's how we have to think about water. Some of it is very valuable, and we are willing to pay a lot for it. And then once we have a lot, we use it for all kinds of things that may be much lower values. Russ: Yeah, like the 40th minute of this hour [?]. Guest: Exactly. Russ: So, I want to start, just to give listeners a little bit of a road map, we're going to start with the developed countries and how they treat water, and then we'll move on to the undeveloped or developing or poorer countries. I want to start with the United States. California--you talk about San Diego. So, every city--not every city, but many, many cities handle water very differently in terms of how it's priced and how it's delivered and your access to it. So I want to take some extremes around the world and see the contrast. So, let's start with San Diego. Tell me about San Diego's water. Guest: San Diego is in the lower Southwest corner of the United States. It's a very hot area. It does not get a lot of precipitation. There's very little storage in terms of underground storage in aquifers. And the population of San Diego quickly outran water supplies years and years ago--in fact, around WWII is when things started getting dire. Because people wanted to live in this beautiful climate. And so San Diego depends on imported water that it gets from more or less two sources. One is Northern California, and the other is via the Sacramento/San Joaquin Delta, which is an interesting political problem, as well as the Colorado River, where the water is pumped up and down over hills for several hundred miles. The important factor in terms of San Diego's water supply is that those two sources are controlled by the Metropolitan Water District, of which San Diego is a member, but not a controlling member. So, San Diego is a little bit dependent on Metropolitan in terms of its water supplies. Russ: Explain what Metropolitan is. What is that? Guest: Yeah. It's--depending on how you count it, it's one of the biggest water utilities in the country. It's one that almost no one has heard of. It was founded in 1929 or so, with the purpose of importing water to southern California from the Colorado River. It has 26 Member Agencies. San Diego is the largest purchaser of water by volume. It's actually the San Diego Water Authority which in turn sells to, I think around 15-20 agencies that are it's members. But the Los Angeles Water and Power is a big member of Metropolitan. Beverly Hills is a little member but Metropolitan. So, Metropolitan is a consortium of cities as well as wholesale districts that brings water into Southern California.
5:57
Russ: And if I'm a San Diego resident, I probably don't know anything about that. I probably just turn on my tap or turn on my sprinkler or take my shower and I just enjoy the water. But, somebody is paying for it. So, how much do San Diegoans pay for their water? Guest: So, I looked up some statistics in advance of our talk. And, it depends a little bit on what you call block trade pricing, which means the first bit of water is cheaper than the next bit of water. But the statistic that I found is that San Diego citizens pay about $5.20 per thousand gallons for water. And I did all the numbers in U.S. dollars and gallons for the benefit of Americans. Russ: So, say that again? $5.20-- Guest: $5.20 per thousand gallons. Russ: Per thousand gallons. And since--I have a little trouble thinking about a thousand gallons. Guest: A thousand lattes. Russ: But it's a big latte. Guest: Sorry, I had my numerator/denominator wrong. It's a lot of water. Russ: How much might I use in a shower? Guest: It's--okay, so, I don't have a good answer for you there. It's probably about--the high efficiency showers are using about, I think about 5 gallons per minute. Russ: Okay. Guest: And in San Diego, people use an average of 150 gallons per person per day. Russ: Okay, so that's a good number. So, 150 gallons per person per day. So, I pay about, if I'm a SanDiegoan, I pay about--let's say, you said it was $5 per thousand? Guest: Right. Russ: So, I'm paying about a sixth--I'm paying about a dollar a day for my water. I'm paying about $360, bucks, a year--to have infinite, near infinite--not quite, but lots of water, whenever I want it. Guest: Right. Now, there's caveats with that, prices. First thing is that you have fixed charges which show up every month, and those are usually quite small in water utilities around the world. Especially facing water scarcity because they load a lot of their costs onto the variable price of water. The other thing is that if they do have increasing block rates then your infinite consumption will start to cost more per unit of water if you go up to a lot of consumption per day. Russ: Okay. But it's still relatively--but, if I'm consuming 150 gallons a day, which is an enormous amount-- Guest: Right. Russ: hard to imagine, which must include some industrial uses, some business uses inside the city, I assume--right? Guest: Not usually. So--by the way, so the statistics on water consumption are usually done on a macro scale. So, it's--what that means is sometimes they do divide, they take the entire population and they take the entire water use and they get the consumption per capita per day. And that's, for example, how I got the statistics for Sydney. But sometimes they do know the residential customer use, and they do divide through by the residential population which they estimate because most utilities don't know how many customers they actually serve. Then, that's how they often get these consumption figures.
9:06
Russ: So, as you started to talk about Sydney, in your book you point out that San Diegans consume about twice as much water as people in Sydney, and about 5 times as much as people in Amsterdam. Is that because they really like to shower for a long time? Guest: That's because they have lawns. Russ: So, what are they? Guest: And lawns and pools. Not laws but lawns. Russ: Oh, yeah. Guest: And sometimes there are actually laws because some homeowners' associations, even city charters, require that you have a green lawn in front of your house Russ: Right. So, how about the pricing side, though? Is the pricing different in Sydney and then Amsterdam? Guest: The pricing is significantly different from Las Vegas. The price in San Diego we just mentioned was around $5 per thousand gallons. The price in Sydney is around $6.50 dollars per thousand gallons. And in Amsterdam it's roughly the same as San Diego--around $5.30 per thousand gallons. Russ: So then that's mostly--the demand curve is further out for San Diegans because of those lawns and pools. Guest: Exactly. It's--you can call it culture or you can call it lifestyle. Russ: But what about the cost? Are costs about the same to deliver a gallon of water to a San Diegan, Amsterdam person, an Amsterdamian, or a Sydneyan? Guest: Yes and no. So, in the case of Amsterdam, it's pretty clear that the cost of delivering water--and almost all of these utilities are regulated, whether or not they are private in terms of investor-owned, or they are public, they are municipal. So, they are all regulated to have prices that are close to their costs. This is important for people that are thinking about gouging monopolies. But the price of the system in Amsterdam is more or less fully costed into the water, in terms of the equipment and the energy and the watershed protection, which is very important given Amsterdam's low profile, it's low elevation. In San Diego, they'll say exactly the same thing: Yes, we pay for wholesale water from Metropolitan. We have to pay for water conservation campaigns and our headquarters, and so on. But most of Southern California water consumption does not include any kind of price for what you would call environmental sustainability. And that would be something--so, that kind of shadow price would add significantly to the cost of water. Russ: What does that mean, environmental sustainability? Guest: Well-- Russ: For example, like, we're wrecking the Colorado River, you suggest. Guest: Definitely. So, the Colorado River, in the last 20 years, has not reached its delta with anything close to a normal flow. So, it dries about before it gets there because all the water is taken out of the river by various users. San Diego being one of them. But mostly it's agricultural users. Russ: And let's go to Las Vegas, which is in the middle of the desert. What are they doing? How can people live in Las Vegas? How are they managing that? Guest: Well, they are a little bit on the edge of tipping off into the abyss. Because, Las Vegas, number one, the city has had a very pro-growth, cheap water policy going for decades. And all the people--and Las Vegas, as you probably recall, was one of the fastest growing municipalities in the United States for a long time, until the financial crisis kind of knocked the wind out of it. And they sell their water very, very cheap. They sell it for about a quarter of the price of all these other cities we've been talking about. And the consumption of water is higher than all of the cities we've been talking about. They are at 220 gallons per capita per day. And their goal by 2035, which is 20 years from now, is to reduce that to below 200 gallons per capita per day. Russ: How do they plan to get there? Nagging and whining? I mean, nagging and pestering? Guest: Yeah, well, you know, in the book I mention that the water is very cheap and so they actually pay people to take their lawns out. They have what's called the Lawn Rebate Program. And so they'll sell you water cheap, but then they'll also pay you to not use that water on your lawn. And that's a high-profile, so-called conservation campaign, that as far as I'm concerned is more about propaganda than about effectiveness. Russ: That's special. I really didn't know about that. That really is entertaining. A lot of people--it's an interesting thing, a kind of a side note, but maybe, it obviously has something to do with it. A lot of people moved to the Southwest to avoid allergies. Guest: Right. Russ: They missed their lawns back East and their flowers and their certain kind of flora that they were accustomed to, so they started planting them there. And then people got the allergies again. It's a strange thing. There is a certain look that is a more desert look for people's lawns. But there are people who are recreating golf courses in their own yards. Guest: Oh, absolutely. And the real estate developers were the first ones to hit on this strategy. So, a lot of palm trees were planted in Los Angeles back in the 1920s and 1930s. And palm trees are universally a symbol of the oasis and water abundance. And all these palm trees were imported and planted and irrigated to give people the feeling they were moving to an oasis. But all that, all those palms, required imported water. And that ended up being a bit of a problem, because everybody believed them and showed up and then demanded palm trees for themselves.
14:52
Russ: So, let's talk about California for a minute. I go out there in the summers, listeners know; and that usually means the excitement--I'm listening to the radio, hearing speeches about how I shouldn't take long showers or maybe skip a shower now and then; don't water my lawn, or if I do, don't water it too much. So there's a lot of what we might call nagging or dunning, or 'moral suasion' is the old-fashioned phrase for it. Where, to make sure there isn't a shortage they try to make me feel guilty about my excessive use. And this seems to be okay, though. So, what's the worry, say, in California and San Diego or in Northern California? Everything's fine. I've never had a situation where I could take a shower. Guest: Turn on the tap. Russ: Yeah. It's always there. What's the crisis? Is there a crisis? Guest: Um, there's a crisis, but it's kind of showing up in, I won't say unexpected places. But the most--so the first thing I want to point out to you--actually, let me give the easy thing first, then I'll get to the more complicated. The first thing is, is that the environment is bearing the brunt of the drought, for example, and the over-consumption. And, by the environment, I mean that aquifers are being drained in an unsustainable way. So, those aquifers are not going to be available--there will not be water in them when you want it. Rivers are drained--the San Joaquin River for decades has been dry, and it used to flow north into the Sacramento Delta. Entire lakes have been drained: Owens Lake, Tulare Lake. So, the environment has borne the brunt of our water consumption to keep the taps on, so to speak. The other dimension of this, which is really--I don't know, really kind of like a practical joke--is that many, many water utilities get a huge amount of revenue from water sales. I mentioned earlier that they load their costs onto the volumetric price of water. What that means is that they are making money when you use water. And if you stop using water, you cut it back and you believe those messages, then their revenues drop much faster than their costs. And that's a huge problem given that they have millions, even billions of dollars in debt. So, what you tend to have are water conservation campaigns that are out there to kind of make you feel good, but really they don't want you to use less water. Because that's going to hit the bond rating. And a lot of water utilities pay a lot more attention to bond rating than they do to other things. Russ: Yeah, that would make some sense. So, do you think--I happen to love Mono Lake, for example, which I think is one of the lakes that's being drained, being affected. Is that correct, do you know? Guest: Mono Lake is under a court order since 1982 I believe, and it was considered one of the great victories of environmentalists against, essentially, growth. In that court order, Los Angeles (L.A.) was ordered to stop draining Mono Lake because it was going to destroy that ecosystem. And now they literally have court mandated water levels in that lake. So, Los Angeles is not allowed to drop the elevation of that lake below a certain point. Russ: And of course a lot of it's not under Los Angeles's control. There's droughts, as you mentioned. There are other factors. So that obviously can affect how much L.A. can take as well. They are stuck with some minimum level that they have to comply with? Guest: Yes. To Los Angeles's credit--this is actually a welcome development but people like me may have been talking about for years--they are looking a lot more closely at what you would call 'local supplies.' So, the Los Angeles River has been paved for decades, as, essentially, a storm drain. And now they are trying to get that water to infiltrate into the ground water. They are also trying to clean up the ground water that's been contaminated by defense industry chemicals so they can use those aquifers for storage. They are going into recycling waste water so that can be put back into the system and used again. So there's a huge, expensive move but very welcome for Los Angeles to get more of its water locally, given that it's losing access to those important supplies.
19:29
Russ: So, going back to this question though of how to handle the fact that if we price it relatively inexpensively, people want to use a lot of it, and that's going to drain some lakes and rivers, cause some problems with aquifers, etc. One view would say, 'Okay. Well, so what? Not a big deal. It's all fine. We should just leave it--it's great. Everybody can use as much water as they want. It's a shocking thing,' I think I have the number correct, 'farming uses about 80% of the water. And that's great because California's got this great farm system. So it's all working well.' What's the argument other than aesthetics or stability for the environment? Are there actual--is there potential for what would be the equivalent, I'll say, a blackout with electric power, where you literally can't get any water? Is that a possible future for California? Guest: Oh, absolutely. If the water's not there, you are not going to get it. I did a crazy, back-of-the-envelope calculation for replacing California's water with desalination, which a lot of people think of as the holy grail. And putting aside the massive energy costs and [?] costs of running desalination, you'd need 500-plus desal [desalination] plants for California. And they just spent 20 years fighting to get one, near San Diego. So, that's not going to happen. What would happen--so the drought in California, it's entering its third year of drought. And a study came out recently saying that California might have a 20- or 100-year drought. So, let's-- Russ: One hundred years is a long time. Guest: That's a long time. That's a big drought. That starts to become relevant. So, if California's third year of drought and fourth year drought goes on, what you are going to get in terms of actual direct human impacts: Agriculture will get in trouble first; that will cause a lot of political problems because the agricultural lobby as you know is very, very strong. And there will be all kinds of problems. Then you have the increasing incidence of wildfires. Many people have their homes in the middle of vegetated areas. Those will burn up. You can keep going down the list. You'll have--Las Vegas is actually spending a billion dollars to build a straw, they call it--it's actually a very large tunnel, deep into Lake Mead. And that is because Las Vegas wants to be the last entity to take water out of Lake Mead, should it drop below where the turbines operate Hoover Dam. So, that's kind of their strategy, is to be the last one standing, at least until that water runs out. So there's many different implications coming down the pike. Russ: But as you point out--water is a renewable resource. It doesn't--it evaporates; it gets spread around, it gets moved around. But eventually it gets back up into the clouds and it comes back down. Why is there--why is California getting worse? You'd think it would just be kind of stable or in some kind of equilibrium. Why is it getting worse? Guest: It's getting worse because--to just oversimplify--the consumption is ahead of that renewable supply. And that means that we are mining the aquifers. That means that we are counting on wet years. This comes up in the news all the time: 'If we just get one wet year, we'll succeed.' Russ: We'll get better. Guest: Yeah. Russ: Like a gambler. You know. I put it all--I put it on red and I just double it every time. Eventually I have to hit it and I'll win. Unless I get wiped out. Guest: Yeah. And the wipe-out. And businesses are going to get, for example, cut off from water. Because when you get to the push-comes-to-shove, no matter how much water people are putting in their pools, residences are going to get water before businesses, before golf courses of course, before farmers. So, you'll end up getting an all-mighty political fight over who is going to get cut in a shortage. And that's happened before. In the 1990s, San Diego got cut very hard compared to Los Angeles. And that was one of the reasons why they have been fighting for years in court over various options of trying to avoid that again.
23:55
Russ: So, I want to read a quote from the book, kind of related to all these discussions in California and general outlook. It reminds me of something. Here's the quote:
In the Beginning was Demand, and water managers treated it as sacred. Modern managers keep their supply-side bias for several reasons. They associate growing consumption with growing wealth. They prefer to drill wells than ask customers to use less water. They are engineers who like to build things. They need to maintain reliability as politicians invite more people to use more water.
It reminded me a little bit of roads. When we have too many people living in an area, instead of asking them to pay for the roads or impose some kind of tax on their usage of the roads, we just build more of them. We try to, anyway. Because there's a natural political bias toward doing that. And there's something, by the way--for a second, I'll--it's not always obviously good to tax roads or to price water. According to scarcity. But in general--it seems in this case, in the case of water, pricing it would be a good idea. But it does depend on what you do with the money. So that would be part of the question. Right? If you add a price to include the scarcity effect and not just the cost, to include the fact that there are these longer-run environmental impacts, aesthetics, as well as possible crises, you've got to do something productive with the money. So that's something that's relevant. Guest: Yeah. And that's always relevant. And in the case of water--I mean, you get into this kind of discussion around, you know, carbon taxes and where the money should go. But in the case of water, it's pretty obviously what to do. And, Singapore, for example, which has one of the better water utilities in the world, does this. They charge a pretty high price--roughly about $8 per thousand gallons. And they use that money to build a very reliable system. It is a lot of engineering. But they monitor water from the rain all the way to the discharge. They recycle that discharge. They actually sell the recycled water as what they call 'new water.' And the new water is under, in, high demand from industrial concerns because it's so clean. And then they also use some of that money to subsidize the poor households in Singapore so that they address this problem of equity that comes up all the time when people talk about higher water prices. Even though we are talking about moving prices from, you know--in Las Vegas's case, $1 per thousand gallons, to maybe $2 per thousand gallons. I'm not sure who is going to go to the poorhouse with that kind of pricing. Russ: It's a 100% increase. Guest: It's a 100% increase. Exactly. That's what the headlines are. 100% of nothing is still, you know, a lot. Or not much. So, that's kind of the way I recommend it. And let me point out that there's this norm of pricing water to recover costs and not make a so-called profit. And I argue that the cost of the water, in terms of scarcity or replacing the water, whatever, is a cost that should be included in the price. But there's lots of lawyers on the other side, represent lawns[?] for example, who don't like that logic. Russ: Yeah. I guess I can see that.
27:21
Russ: Let's talk about the technology for a minute. So, desalination--how do you say it? Desalinization? Guest: I call it 'desalination'. 'Desalinization' is another way of saying it. Russ: And it's longer. Guest: Desal. Russ: Okay. Taking the salt out of salt water is something that people wanted to do for a long time. And I assume we're a little bit better at it than we were, say, 50 years ago. Is there any technological possibility for water the way there might be for, say, other things that are precious? So, in a lot of the things we consume, we get better and better at it. Fracking is an obvious example of how we've been able to get more oil out of the ground. We get higher gas mileage for our cars than we got 50 years ago, so not only is it cheaper to get gas out of the ground but potentially compared to the alternative time, but we can also make a gallon go further. So, is there any technological progress in water? And, if I'm right that there isn't so much, is that because of the lack of--there aren't a lot of people doing it for profit? Guest: Um, yeah. Well there's actually a lot of profit. So the, you know, the utilities might be so-called break even; but they are buying a lot of gear from General Electric and big engineering service companies that are making quite good profits. So, you know, costs are, for the utility, is a profit for somebody else quite often. But in terms of technology, yes the desalination is getting better and better. The problem is, in terms of desal as a silver bullet, is, Number One, you've got a lot of users who are still not willing to pay the price for desalinated water--those farmers you talked about earlier. Number Two is that even if you desalinate the water right next to the ocean, then you've got to get it to customers. Russ: Get it to somebody. Guest: And it's heavy. Water is--it about 8 pounds a gallon. It's a kilo a liter. And pumping water up a hill is extremely energy-intensive. And ignoring all of the climate impacts of using more energy to do something when rain could deliver it for free, you just have to have a lot of power production directed to moving water around. Russ: Can we go back to San Diego for a minute? Guest: Sure. Russ: You mentioned that they get their water from very far away. Northern California, the Colorado River. And then it's pumped over, up and around and over hills--I've seen those, I guess I've seen those--I've seen pipes in California. I suspected they carried water but I didn't know. But you can see them snaking over hills. Guest: Yes. Russ: And in rows. They're ugly. They're an environmental eyesore. That must be extremely expensive. Is San Diego subsidizing the water for its citizens through general tax revenues? And, talk about subsidies to water, generally. And how people don't pay the same amount all the time. Guest: Yeah. Generally speaking, most urban water users are paying more or less the cost of these systems. The big exception--I already--one big exception I already mentioned is that they take the water out of the environment for free. So that's a pretty heavy-duty subsidy. The other one is that a lot of the systems have been built 50 or 100 years ago. And there's a subsidy in the sense that they are not paying prices that do not reflect the cost of renewing those systems. Which is why the engineering organizations say that the U.S. has a D grade on infrastructure. You know? You've already talked about the fact that of course they would give a D. But there are some serious leakages in these systems, for example. And so-- Russ: When I complain about that D-rating because the engineers are self-interested, I'm not suggesting it's an A. Guest: No, yeah, exactly. So, maybe it's not a D. Maybe it's C-. It's not really good, right? So there's a bit of a subsidy from our forefathers who actually paid for these systems. And massive, massive billions of dollars has to be spent to renew those systems that don't necessarily show up on water prices today. The biggest subsidies by far are subsidies that go to farmers in terms of projects that the Bureau of Reclamation and the Army Corps of Engineers has built. And collected $0.10 on the dollar, for example. So taxpayers are subsidizing farmers. As well as what I call an opportunity cost subsidy, in the sense that somebody has the right to use water for free, that is very, very valuable; that their neighbor will be willing to pay a lot for. But they can't purchase that right, because either there is no market or because of the bureaucracy directing to their favored farmers instead of the newer farmers.
32:39
Russ: And the other point to make, which is implicit in all this, is that water in some areas may be priced to cover costs; but the costs are endogenous. They are not writ in stone. And of course if utilities come up with more and more expensive ways to get water rather than discouraging people from using the water that we already have, that's not necessarily a good thing. Guest: Absolutely. Yeah. And so you might have--Las Vegas is building their Straw--and I've said this before, and it happened also in Australia, but what happens is, Las Vegas spends a billion dollars on the Straw. That goes onto customers' bills. Let's say it goes into the volumetric side of customers' bills. Customers look at higher prices and they say, 'I'm not going to use as much water as I was.' And so the demand for water drops by enough that they don't need the Straw. And this happened, absolutely, in Australia where they built 4 or 5 desalination plants, one for every major city. The price of water went up by a lot. It rained, as well. So the desal plants have been shut down. And demand has dropped because of higher prices. And now they have billion-dollar mothballed desalination plants. Russ: So, one more issue in the developed world, and then we'll move to the poorer world, parts of the world. You talked about how water pricing encourages sprawl and is related to what you've been talking about. So, explain that. Guest: Yeah. The simple explanation is that when a new community is added onto the edge, a new suburb is added onto the edge of an existing community, and that community is charged--the new one--is charged the same water price as the existing customers, under what's called 'postage stamp' pricing--so, you know, we send a letter across the United States, you pay the same whether you send it across town or across the country. So that's postage stamp pricing. And what that means is that those new communities are not paying the marginal cost of their additional demand, or even the additional network reaching into that community. They are paying an average cost for the entire network. Which tends to mean that the existing customers are subsidizing growth for the new customers. Russ: Yeah. They are free-riding on those past investments, essentially, because they are not covering any of those costs. Is that a right way to say it? Guest: Yes; and even worse, they are free-riding on the new investments. So the system expansion to serve the new community--say, it's 2000 homes--will be divided among those 2000 homes plus all the existing customers. Russ: Yeah. Lovely. So, again, a last time, before we move to the poorer part of the world: Pardon the metaphor, but couldn't I argue that in the United States the glass is, say, half full? Our water is handled fairly well by the government? Or would you say that we have dramatic things we could do to make things better? And if so, what are those things and how would we--what would the improvements be? Guest: You could say it's half full, because most people in the country have a good supply of drinkable water. You could say it's half empty in the sense that if we allow, for example, water markets to work for farmers then agricultural productivity would jump dramatically, and if you have proper water pricing for scarcity in cities then you would not have, for example, Atlanta going to court to try to take water away from Florida, which is depleting the--their action is depleting and destroying that ecosystem. So, a lot of the problems in the United States that are really good for newspaper sales would go away if we manage water as an economic good. Russ: So, I just want to close this section with a really nice quote I love from your book. And by the way, it's a very short book. It's about 100 pages. It's an easy read and you'll get a nice education in addition to what you are learning here about water. So, here's the quote. And it's in defense of charging for water, a relatively smart way of using prices to cover, to match the true costs. So here's the quote:
Prices generate revenues and reduce demand, but they also give customers choices. A regulation on outdoor watering may annoy a granny with flowers. A desalination plant may annoy environmentalists. An education campaign is condescending to some and a waste of breath on others. A campaign to install low-flow toilets may install sparkling receptacles in unused second bathrooms. Prices send a direct signal at the same time as they accommodate many responses. Customers can choose their own mix of technologies and techniques. Some will take shorter showers. Others will install drip irrigation. Some will shower at work. Others will just pay more. A higher price for water, like a higher price for any commodity, allows people to choose how much water to use. Choice is a pleasant option compared to water shortages or tickets from water cops.
That's a very eloquent, nice defense of pricing water appropriately, and I salute you for it.
37:30
Russ: So, let's use that as our segue into the poorest parts of the world. And I want to start, actually, somewhat, not quite as poor as some, I want to start with Egypt. I learned something fascinating here. Two things that are fascinating. You say, another quote: "Dams also increase evaporation," something you don't think about. When you put water in one place, which is a lake created by a dam. So
Dams also increase evaporation by holding water in reservoirs. Lake Nasser, the desert reservoir created by Aswan High Dam, loses roughly 12 cubic kilometers of water each year. That quantity--over 20 percent of Egypt's water supply--works out to 400 liters per Egyptian per day. Those losses are unacceptable when forty percent of Cairo's 17 million inhabitants receive tap water for fewer than three hours per day.
So you are saying if I live in Cairo and I turn on my tap at the wrong time, nothing comes out? Is that what you are telling me? Guest: Kissing air. [?] That's all you get. Russ: What's going on there? Guest: Well, in Cairo and many other cities what you have is demand greater than supply. I hate to say it over and over again. And they only have a certain amount of water to put in the system. So, you know, you remember the concept of rolling brownouts, or rolling blackouts, when California had its energy crisis. Most cities-- Russ: Explain what that is. Guest: Yeah. It basically means that one section of the city is blacked out because there is not enough energy being generated to serve all sections of the city. So they black out one section of the city at a time, whether it's scheduled or not. Russ: For a fixed amount of time. Guest: Hopefully for a fixed amount of time. Russ: Not all day, but just a little bit. Guest: Yeah. Yeah. So, this happens--so you mentioned the statistics from Cairo. The worst I've ever seen is that people in Jeddah, in Saudi [Saudi Arabia?], where water is sold at a 99% subsidy, so it's extremely cheap, at one point they were up to 20 days without water. And then they would get water for some time during the 21st day. And then they would wait for another 20 days. Russ: But why aren't they taking--why isn't Egypt draining the Nile, doing the things that San Diego and Las Vegas are doing? Take some Mediterranean water, desalinate it? Or is it just a political issue--they'd rather just make people do without water now and then? Guest: It seems that, given the price that they are charging to the Cairo-eens, right, or any other city, given the price they are charging, they don't have enough money to build a distribution network, let alone a treatment plant, that can create enough volume to create a demand at that low price. So, if you were to raise prices, you would see a drop in demand. Although in this case the demand would jump. Because anybody who goes on to 24-7 service tends to use it more than they were when they had to wait for hours or days. But demand would jump and then demand would actually drop down again. That's the pattern you see when people get used to reliable water. And the additional revenue would make it possible to deliver, to pay for the supply network. I hope I said that [?] Russ: Yeah. So, and by demand of course you mean, technically, you mean quantity demanded. Moving along a demand curve, right? Sometimes [?] push it again [?] but we're talking casually here on EconTalk. Guest: Yes. Well, it's, to pull apart that last thing I just said, there are places where people are getting water only a few days of the week, let's say. And what happens is they leave their tap open all the time. Then they fill up their massive tanks or cisterns, on the top of the building or underneath their building, until the tap shuts off again. And then they use that stored water for their household use. And when people--so this is a massive personal infrastructure cost to fix the problem--because public infrastructure doesn't work. So, when they go onto a 24-7 pressurized system, not only does the water quality increase dramatically because now it's not going to be full of crazy bacteria and so on, but also they end up using less water because they can get it whenever they want to. Russ: So, these are places--we are talking about cities in poorer countries. But of course in extremely poor areas, clean water may not be just be available, with any reliability at all. Many people have argued that availability of clean water is the single biggest environmental issue in the world. How are countries dealing with that? Of course, at the root of this often is just bad governance that has nothing to do with engineering or technology. It's just the government's not run very well. Guest: Right. Russ: Give us an overview of the poorest parts of the world, the different ways that they are dealing with water and what might be done if things were different. Guest: So, there's lots of answers. I'll give you a couple of examples. One, a typical situation in India for example is that the price of water is set very low. And so there's no revenue to the utility. They are only going to provide water to the core of the urban area, not to the periphery or to the slums. And then they only provide it a certain number of hours per day. That's kind of a typical scenario for a developing country. What happens then is that people are going to have those tanks; they are going to have suction pumps that they drop into the mains that will try and suck out as much water as is there when it's around. This tends to create negative pressure, which sucks in sewage from all the cracks in the mains, which are next to the sewage lines if you have sewage. So they have contamination; they've got all kinds of problems of supply. And that is, as far as I'm concerned, directly related to the government putting a price limit on water, because they think it's the proper way to help poor people. Another example, which has been in the news for years and years and years is in Cochabamba, Bolivia, where back in the 1990s they privatized the water system under a lot of pressure from the World Bank. Cochabamba is the second largest city. It was served very badly by a municipal company that was corrupt and not reaching other areas. And what happened is that the World Bank stepped in and said, 'We will finance improvements and so on, but you have to privatize.' They had a single bidder that was a consortium of companies, local and international, which included Bechtel out of San Francisco, and then as part of the deal, the consortium said, 'We need to control all the water supply.' Where is where we got that expression, 'They privatized the rain.' This was very unpopular with the locals, especially with the locals who had cisterns, because they didn't want to pay for water service. Eventually the consortium was kicked out and [?] was put back in charge, not providing water. So, that's [?] public-private public failure. The worst nepotism and corruption you can think of. Russ: I just think it's an amazing example that shows you how hard it is to improve the world. Right? So you have a lousy government, so they do a bad job; so you say, 'Well, we know how to solve that. We just have to put it in private hands.' Of course the government's in charge of figuring out how the private hands work, give it to some friends, skim some off the top presumably; and that doesn't work very well, either. And the problem isn't private or public. It's that the governance system there is broken. Guest: Yeah. And I point the finger at regulators all the time because they have the monopoly power, when it comes down to these systems. They can tell a water utility to jump and the utility will say, 'How high?' So, if the regulator is incompetent or corrupt, then you are in trouble.
45:52
Guest: But let me put a bright light on a couple of things. I'll just give one example that was positive, and that was kind of the difference that an individual makes; and that was when a new general manager was appointed to the Phnom Pehn Water Authority in Cambodia. And Cambodia is not only one of the poorest countries in the world but also one of the most corrupt countries in the world. And this guy basically said, 'I'm going to have a professional system.' And he insisted on getting paid for the water. So, the army had not paid its bill for years. It was a very big customer. The manager went to collect the bill and the guy put a gun to his head and said, 'The army doesn't pay.' And the guy said, 'I'm a good Buddhist; do what you have to.' And then the guy rolled, and he paid. And that payment set an example for other customers. So they started collecting money. They started firing staff that were incompetent or corrupt; and they started rewarding staff who were competent. And not only did they expand that system to the slums in Phnom Pehn, but they also lowered the price of water, especially to the people who were under-served. Because they were buying water off of trucks at 10 times the official price, but they had no official service. And when they got connected to the official system, the poorest people of Phnom Pehn suddenly saw their quality improve and their price drop. And that was--it's widely cited as a success. And it's based on, essentially, a guy doing the right thing. Russ: Which is hard to rely on, unfortunately. But it's glorious when it happens. Guest: Right. No, you shouldn't rely on it. But it does show that things can be fixed, sometimes. Russ: Yeah, no, as an economist I always love the Milton Friedman quote, which I'm going to butcher--I'll get a link up to the right version of it. The quote is something like: Instead of trying to find good people to run things you want to have a system where the incentives are such that even bad people do the right thing. And here's a case where the incentives were to do the wrong thing; and this one person overcame those incentives. And I always like to point out--it's not irrational to be moral. Some people think that, 'Well, all the incentives were for him to be corrupt and get rich, too. So that would have been rational on his part.' Well, okay, fine. It would have been. But it would have been a horrible thing to do. And he showed that you can rise above that. Which is lovely. Guest: Yes, exactly.
48:23
Russ: In a better world, what kind of--you've mentioned some of the mistakes that are made in some systems. It seems like some of the problem is a political problem, not so much a corruption problem necessarily. It's the fact that people are used to having water be cheap. They may not be willing to take the chance of paying a higher price in return for guaranteed service that's available elsewhere in the world. Is that a big part of the problem, that the public will not put up with higher prices? They see them as exploitative? Is this essentially the equivalent of laws against price gouging, that I believe hurt most people rather than help them when prices are kept artificially low? Or is there more going on here in the poorest countries of the world? Guest: It's quite sad actually: there's a lot of outside interference with water policy in the poorest countries of the world. One example that I think is actually relevant is the Millennium Development Goal for water, which originally stated that the goal was to reduce by half the number of people who lack access to safe water. Russ: Seems like a good goal. Guest: Seems like a good goal. Russ: Right. What's wrong with that? Guest: So, okay. Tough to measure. So, let's change the goal to reduce by half the number of people who lack access to improved water source. Which means more or less a pipe with cement around it. Russ: Instead of, say-- Guest: Safe water. Russ: What? Guest: Instead of safe water, it's-- Russ: I thought this was 'improved.' What's improved about it besides the cement? Anything? Guest: That's the improvement. Russ: Okay. Guest: So they use it in quotes: "improved" water source. And what happened is that these countries that are chasing their position on the development tables and international aid and so on, they started putting in lots of 'improved' water sources. And they didn't necessarily make sure there was either water in the water source, or drinkable water in the water source. And so--the statistic that's widely cited is that around a billion people lack access to safe water. They are using that Millennium Development Goal as the benchmark. But it's actually more like 3 billion people, because they lack access to safe drinking water. Russ: What are those people doing? Guest: They are getting sick. It's like a terrible, terrible stereotype but in a lot of situations will be true; but in a lot of situations young girls are sent off to get water for the household. They might be walking a couple of kilometers. They might be raped on the way. It's a very well known problem. They are certainly not going to go to school. So you basically, because of the lack of access to safe drinking water, you lose half of the upcoming population. And then they bring the water back, and the water is contaminated. Or it's clean when it comes from the truck, which is half the time, but then it's put in a contaminated container. And people go to the bathroom; they don't wash their hands; and then they contaminate the water that way. So, there's a massive, massive problem with waterborne disease. As you mentioned earlier, the biggest public health improvements ever to happen in the developed world are drinking water and sanitation. Russ: to us [?] Guest: Yeah, exactly. A hundred years ago. That's why all of our child mortality dropped and so on. In developing countries they still have that problem, and that's why contaminated water is the leading cause of death, as far as I recall, around the world.
52:25
Russ: So, let's close by talking about governance more generally. I'm going to start with the developed world example that you give, and you can expand on that. And then we'll talk about poor countries, and it will bring us full circle with some other issues that are frequently mentioned here on EconTalk. You talk about the fact that in America there are different kinds of systems for water management--obviously sometimes there are sometimes municipal utilities and sometimes there are investor-produced utilities that are regulated by a group of bureaucrats or regulators. And you say, some do a good job, some not so good. Here's what you say that I thought was the punchline:
I have a hard time knowing whether managers are doing their best in these cases, but I worry when failure has no consequences. The Tennessee Valley Authority, for example, spilled toxic tailwater into a river and destroyed homes in 2008. How did managers pay the resulting $1.3 billion in fines and cleanup costs? They raised prices for customers.
... Managers with "skin in the game" will work harder. They will be diligent about water quality when they drink from the same tap. They will pay more attention when customers can choose a different tap.
And those are profound, to me, fundamental lessons about how to make things work well: have pay the consequences of their actions. This is what you mean by 'skin in the game.' Competition encourages people to have to do a good job because people have alternatives. In general around the world, some of it's private, some of it's public, but it's often a monopoly. There's no competition. So, take us home by talking about how we might, at least in a perfect world, imagine managers having skin in the game and there'd be some competition for the services they'd provide. Guest: Right. So, ironically, the easiest place to look for competition for urban water is in developing countries. And where these people who are in the [?] or the ghettos where they are not served, they might be served by tankers, they might be served by kiosks that have purification points, and so on. You can have two kiosks right next to each other, in a price battle, in a quality battle, trying to get customers. Sometimes what they do is they put the water from the tap in a bottle and then they put the water from their supply in a bottle and they put a microscope for people to look at what's in the water supply. And that tends to be quite good for customer conversion. So, in developing countries where this competition is allowed--and remember that the city government might not allow this competition because it interferes with the monopoly--you can have fairly dramatic improvements in water quality. That's why a lot of people in developing countries drink bottled water, because they do know that they don't get sick when they drink it. In developed countries it's a lot harder to compete with the monopoly because they have ridiculous economies of scale--that's how we get water prices that are $5 for a thousand gallons, because they have this immense pipe network. And I speak of kind of two ways of increasing virtual competition among those monopolies. One is that you can do benchmarking, and there's a fantastic effort being supported by the World Bank called IBNet (International Benchmarking Network for Water and Sanitation Utilities). You can put up a link to that. And U.S. utilities are not participating in this effort, by the way. And remember, monopolies, they do what they want, and that doesn't have to mean they have to participate in benchmarking. And so what you have is benchmarking at IBNet where they are showing leakage per kilometer of pipes. They are looking at the number of personnel per 1000 customers, which tends to give you an idea of overstaffing. And all kinds of other dimensions are reported at IBNet. And that benchmarking is helpful. In the Netherlands the water utilities which are all essentially public corporations, so they are municipal; but they have an association called Vewin, and they put out reports every 4 years benchmarking against each other, because they've institutionalized that kind of performance and service, and they want to beat each other as well as show their customers that they are doing a good job. So benchmarking is a very good way to create kind of a virtual competition among monopolies. That said, we have to remember that all these water systems have different costs based on their different sources of water. If they are getting water from desalination, that's different from getting it from a river, which is different from getting it from groundwater--which happens to be usually the cheapest source of supplies. Another way that I wanted to kind of talk about competition is an idea that I brought up in my book, is, I call it 'performance insurance.' And what that means is that the utilities are required to buy a bond--this insurance idea came out of a TVA (Tennessee Valley Authority) spill, by the way. And the utilities are required to buy insurance against, essentially, service failure. And what that means is that the insurance company is going to pay if the utility fails, in terms of the water contamination or a broken pipe. And that helps the service quality improve because the insurance company, which doesn't want to pay any money, is going to be all over that utility, in terms of improving its practices. This whole idea requires that insurance companies compete and that it not be corrupt; and I'm not trying to displace the problem into another problem, but I think there's some potential there. At least thinking about these ways. And one last thing I'll add is that in Scotland, it's one large utility called Scottish Water--it's a public utility--they've introduced what they call retail competition. So, there's one utility that owns the pipes and supplies the water. But they've got competing companies that are essentially sending bills and doing customer service and repairing leaks. And that competition is possible because it's not actually a monopolistic service to do customer billing. And so they are trying to unbundle the monopoly into pieces that will allow competition. And that's been quite a success in Scotland and it's being adopted in England now. Russ: That would make Adam Smith very happy, I think. Guest: Exactly. The grand old man is looking, smiling.