How to Quench the American West’s Thirst

A megadrought – the worst in 1,200 years – has been ravaging the American West for two decades, fueling wildfires and exacerbating the region’s chronic water shortages. As global temperatures continue to rise, severe droughts are becoming more frequent and intense – a trend not limited to the United States. Southern Europe, East and North Africa, Australia, and certain parts of Asia and Latin America are also grappling with extreme water scarcity.

On May 22, seven western US states reached a historic deal to reduce water extraction from the drought-stricken Colorado River. Arizona, California, and Nevada have committed to a 14% reduction in their consumption from the Colorado River Basin, a vital water source for roughly 40 million people, by 2026.

Even when economists strongly believe they have a solution to a problem, their proposals are often neglected in policy deliberations. Water scarcity is a prime example. Introductory economics textbooks explain that when public policy keeps the price of a resource artificially below its fundamental value, the result is high demand, low supply, and inevitable shortages. Hence, economists advocate raising the price of water through market pricing.

Higher prices, the thinking goes, would encourage conservation, especially in areas where water is currently squandered on wasteful or inefficient uses. Such a reform, which would benefit the majority of residents, is better than the grim prospect of running out of water.

So, what prevents widespread use of the price mechanism to reduce water consumption? The answer lies in a simple fact: the few who stand to lose from market pricing care far more about the issue than the many who would benefit, and they are prepared to cast their votes, donate their money, and work for campaigns based on this single issue.

As the late political economist Mancur Olson famously observed in his 1971 book The Logic of Collective Action, it is much harder to inform and organize a large number of dispersed individuals than a small concentrated interest group, such as producers benefiting from government protection. This dynamic is at the root of numerous distortionary government policies.

Overcoming the opposition of the few who benefit from the status quo is even more challenging when the proposed reform addresses a problem that the wider public is unaware exists. But everyone is well aware of the water crisis, and the economists’ solution still is not even part of the conversation. While the Colorado River agreement has been hailed as a landmark achievement, allocating water usage among three states does little to address the underlying issue: demand exceeds supply.

The excess demand for water is evident in depleted aquifers and dwindling reservoirs. With water levels having fallen to record lows, Lake Mead, the largest US reservoir, is now approaching “dead pool” status. This means that water levels could drop too low to reach the intake valves at Hoover Dam, halting the flow of the Colorado River and cutting off the downstream water supply altogether.

It may shock many Americans to learn that the largest water user in the West is not a big city like Los Angeles or Phoenix, but rather the alfalfa industry. Alfalfa and hay account for 37% of the water usage in the Colorado River Basin. They and other crops mainly used as livestock feed consume 70% of the water taken from the Colorado River. Cotton is the next most water-intensive crop, followed by wheat, corn, barley, and such smaller crops as almonds and rice. In total, irrigation represents 79% of the region’s water use.

Similar patterns can be found in other places across the American West. Total urban water usage – including residential and business uses – accounts for only 11% of water consumption in western states. The combined populations of Los Angeles, San Diego, Phoenix, Las Vegas, and all the other cities of the US Southwest consume less water than alfalfa alone.

Farmers argue that without access to relatively affordable water for cultivating feed-related crops such as alfalfa, the cost of beef and dairy products would increase. But why should the American public subsidize the production of beef and dairy products?

Apart from the gap between the current water prices and the market-clearing price, which is a form of subsidy, the US government has funded the construction and maintenance of the Hoover Dam and other critical water infrastructure in the West. Farmers may not view these as subsidies, but that is because they have relied on state aid for so long that it has become part of the landscape.

Taxing water, alfalfa, or beef could prove more effective in achieving crucial health and environmental goals than efforts by doctors and activists to persuade Americans to consume less red meat. To be sure, libertarians would oppose such taxes. But what justification can there be for subsidizing water usage and growing thirsty crops like rice in arid regions?

Having said that, the government should compensate groups that would otherwise lose from an increase in water prices, such as farmers and low-income consumers. As part of the Colorado River agreement, the federal government is set to pay $1.2 billion in compensation to those who conserve water. By raising prices, the government could generate far more funds for such payments without adversely affecting the federal budget.

Implementing market pricing to address water shortages would likely face practical complications, political roadblocks, and historical constraints. But innovative solutions could overcome them. For example, pilot programs could test consumers’ willingness to conserve water. Market mechanisms could be greatly expanded, whereby governments buy farmers’ water rights or pay them to reduce their water consumption (for example, by switching crops or improving irrigation techniques).

The acute water crisis currently afflicting the American West could serve the purpose of disrupting the status quo, opening the public’s mind to the radical solution of allowing supply and demand to determine water prices, and overcoming the political inertia that has led to the current predicament.