Is it really necessary to bring in Bill Shughart to emphasize what ought be straightforward?
Water shortages seem to be complicated and mysterious, perhaps caused by population growth, climate change, or both, with no obvious solution beyond deputizing “water police” to fine people who waste water by sprinkling driveways, sidewalks, and streets, or requiring “low flow” toilets. Such approaches to water conservation treat symptoms rather than causes.

The basic problem is almost absurdly simple: water is underpriced. Consumers and businesses thus have almost no incentive to use it wisely.
And thus there are more dairy cattle in California than in Wisconsin, among other absurdities.
Farmers account for 80 percent of the nation’s total freshwater consumption. Roughly half of the more than 60 million acres of irrigated farmland across the United States relies on a method known as flood irrigation, in which fields are flooded with water. Because water for agricultural use is artificially cheap, farmers continue to grow more corn, alfalfa, rice, and other thirsty crops than otherwise, straining water resources. The biofuel industry thrives because of such subsidies.

Nuclear power uses about ten gallons of water per million Btu, while creating ethanol from corn requires a thousand gallons of water on average to generate the same amount of energy. Although nuclear-power plants consume more water than do fossil-fuel plants, they use only about one-fifth of the water required by solar-thermal farms.

Underpriced water also lets the owners of coal-fired power plants, which require large amounts of water for cooling, to delay switching to more water-efficient natural-gas turbines for generating electricity. Hydraulic fracturing of shale deposits can be done with saltwater or even carbon dioxide rather than freshwater, but artificially cheap water raises the costs of employing such alternative technologies.
I'd quibble only with the use of "artificial": market pricing, being a human institution, is artifice in the same way that more complex policies are. And perhaps the reason even college sophomores have trouble grasping the economics is that college sophomores are not yet ready for economics -- never mind that Democrat cliches are offered at about a sophomore level of understanding.
As every college sophomore knows, shortages cannot persist in a market as long as prices can adjust to equate supply and demand. During a drought or when, for any other reason, the demand for water exceeds the available supply, prices predictably rise. Price increases in turn provide incentives both for consumers to economize on water use and for suppliers to increase the amount offered for sale. Hey presto! The temporary water shortage evaporates because all market participants face the true cost of its use.
Let's stipulate "externality-free" before we get too enthusiastic about "true costs." All the same, water pricing is likely, to a first approximation, to get closer to allocative efficiency than more complicated rules can, second-best arguments notwithstanding.  Megan McArdle explains -- caveat about "artificial" still holds.
Artificially cheap water encourages people to install lush, green lawns that need lots of watering instead of native plants more appropriate to the local climate. It means they don't even look for information about the water efficiency of their fixtures and appliances. They take long showers and let the tap run while they're on the phone with Mom.  In a thousand ways, it creates demand far in excess of supply.

Having artificially goosed demand, the government then tries to curb it by mandating efficiency levels and outlawing water-hogging landscaping. Unfortunately, this doesn't work nearly as well as pricing water properly, then letting people figure out how they want to conserve it. For one thing, you can only affect large and visible targets, such as appliance manufacturers or lawns. For another, people will often try to evade your regulations -- my low-flow showerhead came with handy instructions on how to remove the flow restrictor. And, perhaps most important, you limit the potential conservation to the caps. So people have an efficient dishwasher but don't consider doing small loads by hand; they have a low-flow showerhead but don't consider taking shorter showers. In short, no one is looking for ways to conserve more than whatever you've mandated. This may be enough to temporarily manage the current crisis, but it does nothing to set California's water usage on a more sustainable path.
Sustainability, however, requires recognition of simple principles of comparative advantage and public utility pricing.
If we're truly worried about the poor, we could set some minimum amount of water that would be sold at a very cheap rate, with any excess charged at market rates to reflect the actual supply and the cost of providing it. This would be hugely unpopular with homeowners who have big lawns as well as with farmers. And perhaps the fabulous array of California produce would be reduced. But that seems like a reasonable price to pay for keeping California's reservoirs from running dry.
First sentence: that's a standard regulatory principle, offered under the rubric of lifeline, or perhaps, inverted, rates.

Third sentence: what's so fabulous about California cheeses?

One of these days I may have to tell the whole story about the time the Japanese refused to accept a United States trade display because there was some rice in it.  The way people in Michigan interpreted it was all wrong.

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