"...The popular explanation for the water crisis—lack of rain—is clearly inadequate. The state is facing neither a Snickers crisis nor a Mercedes Benz crisis. Candy aisles in all stores are nicely stocked with Snickers, and Mercedes Benz dealers have lots full of new models. There has been at least a modicum of rain over the last year, but there has never been a "rain" of Snickers or Mercedes. So why the threatening problem in water?

According to Pepperdine Policy Professor Wade Graham, "The state uses enough water in an average year to support, in theory, 318 million Californians, more than eight times the actual population of 38 million," mainly because three quarters of the state's water is used in agriculture, with many farmers flooding their fields that could be watered more sparingly with irrigation systems.4 But why do Californians use so much water?

An underappreciated explanation is simple: Water prices have been held down below cost by political forces and by past water infrastructure subsidies covered by taxpayers across the country. As a result, many Californians may see low prices as a birthright.5 How low are water prices? Very! In San Diego and Los Angeles, cities with arid climates in years with "normal" rainfalls (10.34 and 14.93 inches, respectively), the price of water is significantly less than 0.7 cents per gallon (even after rising modestly by 8-10 percent over the past year). San Francisco, which gets almost twice the rainfall of San Diego and close to the average for the state (21 inches a year), has a slightly higher price but still below a penny a gallon.6 Such low prices hardly send a signal that water is as scarce, or valuable, as the governor says.

One of the authors, McKenzie, and his neighbors are even more privileged than Angelinos when it comes to the price of water. His water price in a nice neighborhood adjacent to the University of California, Irvine campus is $1.48 per 100 cubic feet of water (or 780 gallons)—0.2 cents per gallon. Therefore, McKenzie can buy more than 2,000 gallons of water for the price of a gallon of gas. The point is that water remains so embarrassingly cheap in many parts of California that the vast majority of state residents don't know its price (and have little reason to investigate it). So they continue to water with abandon, take long showers, and let their faucets run freely.

The Solution? Pricing, Not Policing

A better solution than water policing? Raise water rates until they hurt (or at least go high enough that Californians notice)—and spur conservation. Economists estimate that in the short run, a 10-percent hike in water rates will cause homeowners to cut consumption by 2 to 4 percent, which means that rates will have to rise by as little as 50 percent to reduce consumption by 20 percent. Substantial water-price increases are working in agricultural areas, where farmers and ranchers have seen a seven-fold increase in the price of water bought by the acre-foot over the last year—from a scant .04 cents a gallon to 0.3 cents a gallon. This means that, last year, farmers could buy more than 10,500 gallons of water for what they would have paid for a single gallon of gas).

Still, the price increase has caused the state's farmers to leave half a million acres unplanted and to send herds of cattle to butchers. Some farmers and ranchers have found selling their water rights more profitable than using them, which means that the available water at the higher prices is being diverted to higher-valued uses than the sellers have. If the higher prices last, conservation will increase. Many farmers can be expected to substitute sprinkling for flooding fields. One can even imagine more farmers becoming "water farmers," that is, selling their low-priced water to people with higher-valued uses. Both sides would benefit from this exchange..."