By Jim Peron
I grew up in Chicago. Now there are two types of weather in Chicago: too hot and too cold. The last year I lived there the temperature went below zero toward the end of November. For the rest of the month, all of December, all of January and most of February the temperature never got above freezing. Now there is nothing particularly amazing about that except for one fact. In the entire time that I lived in Chicago there has never been a banana shortage. Not once!
Considering how cold Chicago gets its apparent that there are no banana trees growing along Lake Michigan. There may be an odd hot house or two which has a few banana trees but these cant explain the fact that there are always quantities of bananas available. No one expects bananas to grow in Chicago and yet no one expects a shortage either. But why?
Compare the constant supply of bananas to the periodic shortages of water which various parts of the world experience. Unlike bananas water is relatively evenly distributed around the world yet you never pick up the paper and read about a banana crisis. So why is it that a resource like
bananas can be easy to find but water, which is more abundant and more evenly distributed, is often difficult to find?
Notice how differently we treat water and bananas. Bananas are usually treated as private property. Individuals or companies run banana plantations. The bananas are produced with the intention of making a profit. They are distributed through markets with the prices fluctuating according to supply and demand. On the whole, governments do not provide bananas. They generally do not subsidise them nor do they attempt to guarantee a steady banana supply. Yet governments do provide water, they do subsidise it, and distribute it. Bananas, which dont have these
government helping hands are in abundant supply and water continues to become scarcer.
The more government tries to guarantee a ready supply of water the more likely there is to be a shortage. Bananas are relatively abundant because governments arent trying to make them abundant. Why is this true?
1.) Bananas have floating prices. Prices convey information to consumers. A low price tells consumers that bananas are in plentiful supply so go ahead and use as much as you want. A high price tells them the opposite and that they should conserve. With water, governments tend to charge the same price at all times. Prices arent allowed to fluctuate to reflect supply and demand so consumers get the wrong message. Sometimes in a crisis the government increases prices to
reflect a drought but then they leave the price there even when the drought is over. This leads to various inefficiencies in industries which rely upon water. Even when governments try to adjust prices according to supply and demand they are too often propelled by good politics to keep prices artificially low. Markets are far more flexible than bureaucracies.
2.) Banana profits also float. Where there is a shortage of bananas the prices go up and so do the profits to the producers. Just as prices convey information to consumers, profits convey information to producers. High profits mean produce more of the product. Losses mean produce less.
One argument for free speech is that the one way we determine what is true is by a vigorous debate. Censorship makes it hard to discover the truth. The same thing happens when governments censor prices and profits through regulations.
Also notice how prices create the short-term solution to the problem while profits create the long-term solution. When prices go up consumers use less: which is precisely what is required during a
shortage. Meanwhile the higher profits encourage the long-term solution of increased production.
3.) Most people pay market prices for bananas and dont have their consumption subsidised. A government subsidy to bananas would distort the information contained in the price thus leading to wrong consumption habits. A subsidy lowers the price of bananas and tells consumers that
there are more of them around than actually exist. So consumers increase their consumption of bananas but there is no increased production. This would lead to a shortage. Yet in many places of the world this is exactly what happens with water which is frequently subsidised. No
wonder we arent short of bananas but we are short of water.
4.) Bananas pretty much cost about the same for everyone. They may fluctuate from place to place, as they should, but in any one place the price is the same for all people. One group cant buy bananas at a lower price than everyone else. But around the world this isnt true
for water.
Many governments sell water to farmers at a much lower price than is charged to urban consumers. The people in Los Angeles pay something like R1,200 for each acre foot of water but California farmers pay something like R84 for the same water. This leads to lots of odd
behavior. Much of California is a desert but there are actually rice farms there. Rice, which uses intensive amounts of water, wouldnt be profitable to grow in a desert unless you are getting the water at a subsidised rate.
5.) Bananas can be transferred from one owner to another without much hassle. But in many places of the world there are no markets for water. Remember those farmers in California who paid R84 per acre foot? Well, they could actually use drip irrigation and save on water consumption.
But they dont do it because the system would raise their cost to R1000 for each acre foot of water. But since they are only paying R84 for the same amount this would be a loss. On the other hand if they are allowed to sell their water to Los Angeles everyone comes out ahead. The water saved and sent to LA would fetch the farmer R1200 while his cost would be R1000. So by conserving water and reselling it to the city he makes a profit and the city gets water. In other words everyone
benefits.
If the owners of water rights are allowed to transfer the water, the water moves from a less efficient use to a more efficient use. Currently in the world there are many cases where the water used for a crop is actually more valuable than the crop itself. In these cases, it makes a lot
more sense to let the owner sell the water for its highest valued use and forego using it for the crop. But if water rights arent transferable then he will continue to produce the crop instead.
When it comes to water, people act very strangely. Since they are getting the wrong signals they act is wrong ways. The supply and demand of any product or resource constantly fluctuates. One reason that markets are efficient is that they allow prices and profits to mirror these
fluctuations. Consumers and producers thus constantly receive signals telling them how to adjust their habits. But in the world of water, government interventions, all done with the best of intentions, distorts the signals and ends up encouraging people to act in bizarre ways. In a
world where water is a property and distributed through markets youre not likely to get rice farms in the middle of the Sahara.
In a nutshell heres what needs to be done:
1. Water should be treated as private property.
2. Water rights should be transferable like all other property.
3. Water prices should be left to the forces of supply and demand.
