Drought pricing for water in North Carolina

John Whitehead in Cleantech Collective: North Carolina is experiencing severe drought. In response, voluntary command and control regulations have arisen to deal with the water shortage. Funny story ... voluntary command and control regulations don't work (Raleigh's water use sets record in August):

Despite mandatory restrictions, Raleigh's water use has soared this month, setting three all-time daily highs.

The use directly correlates with recording-breaking temperatures. Still, the numbers startled city officials, because use spiked when only half of their water customers should have been watering their lawns, which officials think accounts for as much as 20 percent of total water consumption.

Yesterday, Governor Easley asked North Carolina residents to reduce water use by 20% and Raleigh "... will limit lawn watering with sprinklers and irrigation systems to one day a week and vehicle and power washing to the weekends." Don't expect these policies to have much impact. Command and control regulatees usually can find a way around restrictions. If commercial fishermen are told to reduce the number of fishing trips then they get bigger boats so that they can catch more fish on each trip. In the same way, if households are asked to water their lawns on a limited number of days, then they'll increase the amount of water they put on their lawn that day.

Price controls are the real problem. If the price of water was allowed to rise sufficiently in response to drought conditions (i.e., a supply reduction) water consumption (i.e., quantity demanded) would fall during a drought. Here is how Olmstead, Hanemann and Stavins say it in their conclusions in the latest issue of the Journal of Environmental Economics and Management (doi:10.1016/j.jeem.2007.03.002):

... To the extent that [increasing block prices] increase the portion of consumers facing efficient prices for a scarce resource on the margin, they may well be welfare improving (and environmentally beneficial at the same time). Exploration of the efficiency advantages of IBPs is another area for further research.

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