More from Auganomics: 20 July 2008
More Supply versus Higher Prices

Many people think that “shortages” can be solved by “making” water with desalination. I don’t like that idea, and neither do these Australian economists:

They argue the most efficient way to regulate water usage would be to price water according to supply and demand so that householders pay more in times of drought and less during times of heavy rainfall. “Just like we do for bananas, we should pay more when less is available,” they write.

Professor Crawford said higher prices during drought would provide a better incentive for people to curb their use, and those who used large quantities of water would have to pay for it.

“If we had flexible water pricing people could choose how much water they wanted to use and where they use it,” he said.

More supply (via desalination) will not fix a shortage because demand will expand to absorb new supply.

Bottom Line: We should price water like bananas.