Solutions for a Water-Scarce World (Part 1)

Editor’s Note: This is the first two articles we will be publishing in the coming weeks on solutions for some of the many issues surrounding water management, from conservation to climate change to the equity of water costs.


The timing of this article may seem ironic: past months have seen record rainfall in the Gulf of Mexico and the United States, originating first from Hurricane Harvey, Irma, Jose, and finally Maria. Understandably, during and following such events, mainstream media is dominated by questions of water excess and the associated human stories. Water scarcity, however, remains an ongoing and insidious problem, despite not seeming to present us with an immediate crisis. But it is just these times when crises do not loom imminent that we find ourselves with a rare and valuable opportunity: time to discuss and formulate solutions so that when (not if) drought returns to areas such as California, society finds itself better equipped to address the shortages. We write our article in this spirit of preparation for the drought ahead.

As the climate continues to change, and populations grow and move to urban centers, water managers increasingly face the threat of water shortfalls. At their core, most questions of water provision involve a delicate balancing act between water supply and water demand. Water supply involves identifying sources of water of sufficient quality and quantity, and then building and operating the infrastructure necessary to collect, treat, and distribute the water for human use. Conversely, water demand is the total quantity of water desired by humans in order to fulfill all our various water needs. When, in a given locality, water demand outstrips supply, a shortfall occurs. The historical response to a shortfall has often been to increase supply.  However, focusing on supply augmentation in isolation looks only at half of the supply-demand balance and thus gives an incomplete picture (as would only focusing on changes to demand). Increasingly, so-called “portfolio” approaches are being called for, whereby the impacts of possible changes to supply and/or demand are considered together. In support of this, the remainder of this article examines the varied courses of action open to water managers to increase water supply and/or suppress demand, in order to effectively develop a system capable of coping with future conditions of increasing scarcity and more frequent supply shortfalls.

Supply side actions

On the supply side, the predominant actions available to better cope with water shortfalls include the addition of new water sources. These actions are heavily infrastructure focused. Building dams to create additional reservoir storage has been one successful approach. But while still a viable option in many (especially developing) countries, dams are not a panacea for addressing water shortfalls. In the United States for example, increasing costs, few remaining viable sites, and lack of popular support have contributed to the lack of recent dam construction. Other sources of supply include (deeper) groundwater wells, desalination to extract freshwater from ocean water, and small-scale rainwater harvesting on rooftops. Other less apparent supply side actions include building infrastructure to move available water from wet, sparsely populated areas to drier, densely populated areas (e.g. China’s South-North Water Diversion Project) as well as wastewater reuse whereby wastewater is collected, treated and used variously for potable and/or non-potable uses (e.g. Orange County in California, Windhoek in Namibia, and Singapore). However, as the experience with dams in the U.S. illustrates, it is unrealistic to just keep increasing supply indefinitely; eventually resources (whether financial, political, or physical) run dry, which further highlights why consideration of both supply and demand is key.

In addition to the “straightforward” addition of further supply sources, source diversification also has an important role to play in safeguarding water supply reliability given future pressures and uncertainties. In the same way that an investment portfolio is made up of various stocks, each with their own risk and expected return, so too diversification of a water supply portfolio has shown to offer increases in reliability. For instance, water derived from reservoirs or rainfall harvesting is rainfall dependent, whereas water from reuse and desalination are virtually climate independent. Thus, all else equal, a city currently reliant on reservoir water could advantageously consider a climate-independent additional source rather than investing in a further climate dependent supply source. These complementarities of different supply sources should be routinely considered in addition to other metrics such as cost, amount of water generated and environmental impact.

Demand side actions

Many water managers, especially those responsible for water systems in developed regions like the desert southwest of the United States, find supply augmentation projects prohibitive, primarily due to cost considerations or political pressures. As a result, they increasingly rely on demand-side-management measures in an effort to maintain a balance between supply and demand.

Broadly speaking, managers have two categories of water conservation approaches available to them:  price (or market) based approaches, or non-price based approaches. Among non-price based approaches, command and control strategies such as mandatory and voluntary water use restrictions (most notably restrictions on lawn watering and car washing) are the most common. Most scholars, however, have concluded that such command and control approaches fall short of achieving economic efficiency (see, for example, this paper), where economic efficiency broadly means doing the most good with the limited resources available to society. In the context of water, it would be economically inefficient, for example, to require that one consumer use half as much water as she desires while giving another consumer the ability to use twice as much water as she desires. But this, in effect, is what many command and control water use restrictions achieve, given that they are applied indiscriminately to all water users. Since there are real costs associated with some consumers being artificially constrained in their consumption choices and others not utilizing all water available to them, economic inefficiency is sometimes referred to as “leaving money on the table.”

Most resource economists advocate for water price increases to control demand. If the price is “right,” demand and supply balance each other and preclude the need for further conservation activities. Economists tend define the “right” price as the full economic cost of delivering the next unit of water to a consumer (i.e. the water’s long-run marginal cost). Any price for water less than its full cost will be detrimental to society since demand will eventually outstrip supply, resulting in shortages that necessitate either voluntary or mandatory cutbacks. By full economic cost, economists have in mind more than the costs of the water’s treatment, distribution to users, and future capitalization costs (i.e. replacement/expansion of existing infrastructure). They also have in mind the concept of opportunity cost, or the idea that my use of a scarce resource today precludes my neighbor’s use of it today, and both our uses of it tomorrow. In water-rich regions, opportunity cost tends to be low; since there is so much water to go around, little opportunity (present or future) is lost by use of it today. In water-scarce regions, however, opportunity cost can be high, leading to necessarily higher long-run marginal cost prices. While water prices today typically cover the cost of treating and distributing water, as well as some component of future capitalization efforts, water prices almost never incorporate opportunity cost. Thus, current prices may grossly understate water’s true cost of supply, especially in water-scare regions.

In practice, however, water managers rarely use pricing as a conservation tactic. Water utilities constitute “natural monopolies” (i.e. monopolies that society allows because one firm operating as a monopoly can provide its service—in this case water—more cheaply than multiple firms operating in a competitive setting). As such, regulatory agencies comprised of elected officials set water rates. And unsurprisingly, said officials’ constituencies dislike increases in their water bills. Increasing water prices therefore tends to be a complicated process.  For equity conscious water managers, the regressive nature of water price hikes (the economic burden of a “regressive” policy falls disproportionately on those of lower income) proves to be another strike against increasing rates. As a result, municipalities may endeavor to keep water rates low and subsidize the water utility though other means. And while academics have proposed various pricing and trading schemes to address both water conservation and equity concerns, water managers have increasingly relied on subsidy programs, such as rebates for water efficient devices (toilets being one example) to manage demand. To be sure, many of these programs save water. In our next article in this two-part series, we evaluate one such rebate that targets outdoor water use, the Las Vegas based Water Smart Landscapes, or “Cash-for-Grass” program. While we show this program to be effective, it remains to be seen whether such a program provides sufficient advantages over other options.


Image courtesy of Flickr. Originally published by S&S on December 27, 2017.

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