California: Part III

Water water everywhere.  And not a drop to drink.

Sounds like California is thirsty:

Operators of the sprawling state system that supplies water to 25 million Californians from Butte County to San Diego issued their lowest-ever estimate on the amount of water they will be able to deliver.

Officials predicted Tuesday they will be able to offer only 5 percent of the total volume of water requested by California cities and farms next year. That’s the smallest water allocation the agency has released since its creation in 1967.

Government in Action

That’s quite a gap.  Now, to be fair, you can see in the chart above that there are years in which the water allocations eventually meet 100% of the need, but more than often, they don’t.

Makes you wonder why this is, right?  I mean California should have plenty of water to supply their need.  Why are they so short so often?  What could possible cause a shortage in a specific commodity?

Well, I just finished a fantastic book:  Basic Economics by Thomas Sowell.  And it just so happens that Mr. Sowell does indeed talk about shortages and what causes them.  One word:  Regulation.  For example, have you ever noticed that it always seems the grocery store is out of Coke when you go to buy some?  Or that gas stations always seem to be empty when you need to fill up?  I know I know.  Every time you go to buy a pair of sunglasses, there are none available?  Huh?  Never happens?  Wanna know why?  Because no one is regulating the price of these products.  They are selling at a price the market can bare.  And so supply is nearly always available.

Now, if I told you that Wal-Mart was going to be selling Coke 6-paks for a dime starting at 6pm tomorrow night, what do you think the scene would be?  Packed initially and then finally, they would run out.  They would run out when under normal circumstances, they would have a predictable supply for anybody to come and buy as much as they need/want.  And why doesn’t someone come in and buy all of the supply of Coke now?  Because the marginal cost of Coke dictates that we won’t waste or hoard it.

So, again, what cause a shortage?  Regulation; specifically the imposition of a reduced price when supply remains fixed.  So, why do you think that California State Water Project has problems meeting 100% of need?  Because they are regulations in place that reduce the cost of water for significant portions of the population:

In 2002, the average price paid for irrigation water from the CVP (Central Valley Project-An agricultural district) was less than 2 percent of what residents of Los Angeles pay for drinking water, and less than 3 percent of what residents of San Francisco pay.

What does this mean?  It means that farmers can grow crops in regions where those crops wouldn’t normally grow because it’s too dry.  But because they are getting water at less than the market rate, these farming practices are continued and water is going where it wouldn’t otherwise go.

The lesson is simple, if you want there to be a 6-pak of Coke at the local Wal-Mart, you better hope that it’s expensive enough to be there.

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