One way to conserve water is to pay people to not use it.
That’s not the normal way of talking about water markets, but that’s one way of framing what’s going on right now between Southern California urban water users and rice farmers up north:
With the drought stretching into its fourth year, a heavyweight water agency from Los Angeles has come calling on Sacramento Valley rice farmers, offering up to $71 million for some of their water.
The price being offered is so high, some farmers can make more from selling water than from growing their rice.
Users (in this case rice farmers) conserve in a dry year and are compensated. Overall system water use (by “system” I’m talking about the state’s interlinked artificial watershed) is reduced. The shock that might otherwise happen if the shortage happened arbitrarily (one or the other parties to this transaction simply running out of water) is avoided.
Potential uncaptured externalities: the people who sell farm equipment to the rice farmers, and their employees. This is not without negative spillovers.
That’s just first tier externalities. Second-tier include reduced employment (and populations) in the towns where the idled farm workers live. Most people that poor save nothing; everything is spent at the grocery store, auto parts store, Wal-mart, etc. So reduced salaries to farmworkers immediately ripple throughout the local economy. And as people leave, the schools lose kids and the tax base shrinks. (and on and on and on …)