According to the NY Times, some Californians
would have to cut their water consumption by 35 percent under the terms of a preliminary plan issued by state officials on Tuesday to meet a 25 percent mandatory statewide reduction in urban water use.
There is an obvious way to achieve this, raise the price of water. If its obvious why isn’t it the first thing California did some years back when it was clear that water was scarce? In some cases the hands of the state are tied by water rights allocated for commercial purposes, so lets focus on household consumption.
We know that the first tool the state reaches for is regulation. See, for example, the following memo from the California State water board. Interestingly, it begins by noting that the state is in the 4th year of a drought! Eventually, it is clear that regulation is insufficient and then, price increases are considered. In fact, the water reduction targets quoted from the NY Times above come from a report by the Governor of the state that also urges the use of
rate structures and other pricing mechanisms
to achieve reductions. Again, why is price last rather first? Is this because the state must maintain a credible reputation for not exploiting its monopoly power with water?
If one is going reduce consumption by raising prices, should it be an across the board price increase? Note that consumption is metered so the exact amount that is purchased by a household is known to the provider. The state also has access to other information: location, home size, family size and income. In principle, the state could price discriminate. Here is an example from the Irvine Ranch Water district. Each household is given an initial `allotment’ that depends on household size and area that is landscaped. Exceed the allotment and the price of water rises. For more details and the impact on consumption see the following paper. Is it obvious that this is the `correct’ mechanism?