The greatest environmental problem is a shortage of clean water. Severe droughts in the US Southwest and other areas have already brought reductions in water for agriculture and households. The weather phenomenon El Niño now brewing in the Pacific Ocean may bring relief in 2015-2016, but the water problem is global and long-term. People throughout the world are using up clean water faster than it can be replenished. The coming water crises will not appear gradually, but will be swift catastrophes that suddenly leave millions of people without water to drink.

California is suffering from a historic drought, along with the Colorado River Basin, Texas, and other areas of the Southwest. The Ogallala Aquifer of the Midwest is getting depleted. The lack of water affects the production of electricity, because much water is needed for power plants. Shallow lakes and rivers will also stop the transport of goods by ship.

Lake Mead in Nevada, has been falling; it is now at 37% of full pool. A continuing loss of water could leave the lake dry within a decade. Before it dries up, there will be electricity delivery cuts in Arizona and Nevada, and then hydropower generation at Hoover Dam could shut down.

Farmers in California’s Central Valley are pumping out water that took thousands of years to fill, and when underground reservoirs are empty, some cave in. Water shortages bring on conflicts, some of which go to court, some of which result in political struggles, and, world wide, some will bring war.

“Freshwater makes up a very small fraction of all water on the planet. While nearly 70 percent of the world is covered by water, only 2.5 percent of it is fresh. The rest is saline and ocean-based. Even then, just 1 percent of our freshwater is easily accessible, with much of it trapped in glaciers and snowfields. In essence, only 0.007 percent of the planet's water is available to fuel and feed its 6.8 billion people.”
—National Geographic

According to the National Geographic, “Freshwater makes up a very small fraction of all water on the planet. While nearly 70 percent of the world is covered by water, only 2.5 percent of it is fresh. The rest is saline and ocean-based. Even then, just 1 percent of our freshwater is easily accessible, with much of it trapped in glaciers and snowfields. In essence, only 0.007 percent of the planet's water is available to fuel and feed its 6.8 billion people.”

Modern food production is water-intensive. According to National Geographic, “The average hamburger takes 2,400 liters, or 630 gallons, of water to produce.” Water use is growing faster then the population increase.

When water levels drop below a particular level, the pumps have to shut down. Water for drinking can be trucked in, but that is too expensive for other uses. What happens then is factories shut down, real estate prices collapse, crime rises, and the population moves out.

Desalination may help in some places, but is not an overall solution to the water shortages.

Desalination plants could provide water especially to coastal areas such as California. However, the process of planning and obtaining permits takes many years. Desalination plants create environmental damage where the salt is released. The production of usable water from the oceans also requires much energy. Desalination may help in some places, but is not an overall solution to the water shortages.

There has been much discussion about the decaying bridges and highways in the USA, but infrastructure also includes water pipes, which in many cities are over a century old. About 1/6 of the water supply is lost from leaks.

People have what psychologists call “normalcy bias.” People underestimate the possibility of a disaster and its likely effects.

While there has been progress in water conservation, people and governments are still not acting to prevent the on-going depletion and to fix the crumbling infrastructure. People have what psychologists call “normalcy bias.” People underestimate the possibility of a disaster and its likely effects.

While nature creates scarcity, bad policy creates shortages. The remedy is market-based pricing, where the quantities demanded and supplied are equal. But free markets don’t work unless the institutional setting enables efficient pricing. For example, the cost of extracting water from underground pools includes not just the cost of pumping but also the social cost of depletion, the cost to users in the future from a reduced underground pool.

Economics provides a basic remedy for any shortage. While nature creates scarcity, bad policy creates shortages. Prices set below free-market levels result in the quantity demanded being greater than the quantity supplied, the definition of a shortage. The remedy is market-based pricing, where the quantities demanded and supplied are equal.

But free markets don’t work unless the institutional setting enables efficient pricing. For example, the cost of extracting water from underground pools includes not just the cost of pumping but also the social cost of depletion, the cost to users in the future from a reduced underground pool. Therefore the market price of the water has to be set at the quantity for which the extraction is sustainable, taking into account the property rights of the other users, including future users.

The market-based pricing of water is often higher than the cost of extraction, and that difference constitutes “economic rent.”

The market-based pricing of water is often higher than the cost of extraction, and that difference constitutes “economic rent.” The question of who should receive that rent depends on whom one believes is the proper owner of natural resources in general. If we believe that human beings have equal natural rights, the implication is that the rent of material natural resources as well as spatial land should be shared equally. An equal distribution of the rent can be accomplished either via government revenues or as cash dividends to residents.

The effects of market-based water pricing would cascade throughout the economy. Higher prices for water would reduce agriculture in arid climates to crops with high value relative to water consumption.

The effects of market-based water pricing would cascade throughout the economy. Higher prices for water would reduce agriculture in arid climates to crops with high value relative to water consumption. There would be no need to inflict punishments for particular water uses such as lawns, as market prices would induce conservation. The poor could be granted some minimum of household water at lower prices; otherwise, market-based pricing would induce efficiencies in energy and industry.

Politics today imposes restrictions on water use rather than market pricing, as historical water rights prevail in many places. Normalcy bias has stopped the public from demanding sustainability, As droughts continue, the coming crises will spur governments towards ever more severe restrictions. Let’s hope people turn to sustainable pricing before the crises become catastrophic.