I n t h I s c h a p t e r y o u w I l L

Tr i c k l e - D o w n E c o n o m i c s
B
Y
T
ERRY
L. A
NDERSON AND
C
LAY
J. L
ANDRY
Water shortages are being blamed on
the drought in the East, but that’s giving
Mother Nature a bum rap. Certainly the
drought is the immediate cause, but the
real culprit is regulations that don’t allow
markets and prices to equalize demand
and supply.
The similarity between water and
gasoline is instructive. The energy crisis
of the 1970s, too, was blamed on na-
ture’s niggardly supply of oil, but in fact
it was the actions of the Organization
of Petroleum Exporting Countries, com-
bined with price controls, that was the
main cause of the shortages. . . .
Once again, regulators are respond-
ing to shortages—in this case of water—
with controls and regulations rather than
allowing the market to work. Cities are
restricting water usage; some have even
gone so far as to prohibit restaurants
from serving water except if the cus-
tomer asks for a glass. But although
cities initially saw declines in water use,
some are starting to report increases in
consumption. This has prompted some
police departments to collect lists of res-
idents suspected of wasting water.
There’s a better answer than send-
ing out the cops. Market forces could
ensure plentiful water availability even in
drought years. Contrary to popular be-
lief, the supply of water is no more fixed
than the supply of oil. Like all resources,
water supplies change in response to
economic growth and to the price. In de-
veloping countries, despite population
growth, the percentage of people with
access to safe drinking water has in-
creased to 74 percent in 1994 from 44
percent in 1980. Rising incomes have
given those countries the wherewithal to
supply potable water.
Supplies also increase when current
users have an incentive to conserve their
surplus in the marketplace. California’s
drought-emergency water bank illus-
trates this. The bank allows farmers to
lease water from other users during dry
spells. In 1991, the first year the bank
was tried, when the price was $125 per
acre-foot (326,000 gallons), supply ex-
ceeded demand by two to one. That is,
many more people wanted to sell their
water than wanted to buy.
Data from every corner of the world
show that when cities raise the price of
water by 10 percent, water use goes
down by as much as 12 percent. When
the price of agricultural water goes up
10 percent, usage goes down by 20
percent. . . .
Unfortunately, Eastern water users
do not pay realistic prices for water.
According to the American Water
Works Association, only 2 percent of
municipal water suppliers adjust prices
seasonally. . . .
Even more egregious, Eastern water
laws bar people from buying and selling
water. Just as tradable pollution permits
established under the Clean Air Act have
encouraged polluters to find efficient
ways to reduce emissions, tradable water
rights can encourage conservation and in-
crease supplies. It is mainly a matter of
following the lead of Western water
courts that have quantified water rights
and Western legislatures that have al-
lowed trades.
By making water a commodity and
unleashing market forces, policymakers
can ensure plentiful water supplies for
all. New policies won’t make droughts
disappear, but they will ease the pain
they impose by priming the invisible
pump of water markets.
S
OURCE
: 
The Wall Street Journal,
August 23, 1999,
p. A14.
I N T H E N E W S