Water is scarce. So why is it underpriced?

A drinking fountain in Rome. Image: Getty.

In the summer of 2017, for the first time in 2,000 years, Rome shut off its public water fountains. 

Since the first aqueduct transported water to public fountains at the ancient city’s cattle market, there has always been water to supply Rome’s fountains. Through centuries of wars, conflicts, revolutions and other human and natural catastrophes, the tradition of free fountain water in Rome has continued uninterrupted, until the devastating 2017 drought.  With farmers in the surrounding countryside facing over one million euros in agricultural damages, city authorities decided to stop the flow of water to Rome’s 2,800 public fountains.

The tradeoff that Rome faced – water for its fountains versus averting a catastrophic drought for farmers – is likely to occur again, as agricultural, municipal and industrial uses of water arise and climate change makes dwindling supplies even more variable. 

But this dilemma isn’t limited to Rome. For the entire globe, the era of plentiful water appears to be over.

Every year, water shortages affect more than one-third of the world’s population – around 2.5 billion people.  By 2030, water scarcity may displace as many as 700 million people worldwide. By 2050, more than half of the global population – and about half of global grain production – will be at risk due to water stress.

If water is valuable and scarce, why is it so poorly managed?

The problem is that our policies and institutions for managing water were developed when the resource was abundant, not scarce.  We continue to exploit freshwater as if it were limitless.

To find a way beyond this impasse, we must put an end to policies that underprice water and allow it to be used as if it was a plentiful resource. There are two approaches that could make a significant difference.


First we must allow markets for trading water to flourish.  Throughout the world, the predominant use of water is for irrigated agriculture, around 80% of all water withdrawals.  Yet, the fastest growing demands for water are for urban residential, commercial and industrial use. Because people in cities have less water, they are willing to pay much more for it than what it costs farmers to water their crops or pastures.

Through water markets, farmers could sell any excess water to other users, allowing both parties to gain. Urban users are able to pay lower prices and increase consumption. Farmers would have another revenue source, and because their water is now more valuable, they will squander less and conserve more.

Already, many regions and localities are experimenting with various water trading schemes.  In some places, farmers sell all or part of their water rights; in others, they lease their water over one or multiple years. 

One promising development is water “banks”.  Like regular banks, farmers deposit their excess water, including “savings” from conservation, and can subsequently draw down these deposits during future droughts.  Alternatively, farmers can sell or lease some or all of their water deposits to other users. Environmental and recreational groups also pay to keep the deposits in rivers, lakes and streams, thus preserving valuable habitats.

Second, we must stop subsidizing water and sanitation services for residential, commercial and industrial users. Current prices charged rarely cover the full costs of these services.  Governments typically pay for most if not all of the investment costs, and often subsidize the operating costs.  Any environmental damages are usually settled through costly litigation.

Ending the underpricing of water and sanitation services could improve cost recovery and lead to greater conservation by users.  A fixed service charge could pay for the costs of operating and maintaining the water system.  A two-tier block rate charge for households would increase water conservation while protecting low-households from the burden of water pricing. 

Since poorer households use less water, typically less than 20 cubic meters of water per month, the price for this first “block” of water could be kept very low.  However, for monthly water use that exceeds 20 cubic meters, the price would be set much higher.

Finally, some of the revenues earned by local utilities and governments could finance the adoption of water-saving technologies and domestic appliances by households through discounts and rebates.  Additional programs could be targeted to low-income families, who would otherwise find it difficult to pay for new appliances or repair faulty plumbing.

Creating water markets and ending the underpricing of services are just two of many ways in which we can manage the rising scarcity of water to meet new and growing demands.  Otherwise, we may find tradeoffs like that in Rome an increasingly frequent occurrence.

Edward Barbier is a professor in the Department of Economics, Colorado State University, and the author of The Water Paradox, out now from Yale Books.

 
 
 
 

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