Opinion: Water is Priceless and That Is a Problem

Daniel J. Van Abs | April 24, 2017 | Opinion
Water users don’t pay environmental costs like reduced stream flows; they don’t pay opportunity costs — the costs of what could have been done with water had they not consumed it

Daniel J. Van Abs
Water is priceless and therefore too cheap. After all, “priceless” means “without price.” When water reaches your home or business, the cost of that drinking water is really the costs of taking it from the source, such as a well or surface water, plus treatment and delivery. There is no cost for the water itself. None at all. As we know from the work of many economists from both liberal and conservative traditions, anything that doesn’t have a price tends to be overused, a concept that Garret Hardin termed “The Tragedy of the Commons” in an article in Science magazine in 1968, just as the environmental movement was gaining force. The lack of a “price signal” tells gives people an incentive to use more of a scarce or finite resource than they truly need, to maximize their benefit. If everyone does that, the resource can be destroyed.

Water in New Jersey is a public-trust resource, owned by all the public (both present and future) but managed on their behalf by the state government, through the New Jersey Department of Environmental Protection (NJDEP). We have laws and regulatory systems to prevent overuse of ground and surface water supplies overall, by limiting how much can be withdrawn. However, the focus of these regulations is on the water utility, not its customers. The lack of a price for the water itself means that individual customers aren’t faced with the full cost of using that water. Yes, they pay the costs of delivering drinkable water, at least in theory. However, water users don’t pay for the environmental costs such as reduced stream flows, nor do they pay for the opportunity costs — the costs of what could have been done with that water had they not consumed it. For these reasons, cheap water tends to be overused, as there is far less of a price incentive to conserve. With that overuse, other potential users can be prevented from getting a share of the available resources.

Three critical concerns

When considering a cost for public resources, three major issues arise. First, will people agree that a price should be set? Second, how would a price be set that is fair? Third, what uses of those funds would be appropriate?

Getting agreement that a price should be set requires, first and foremost, that we recognize and agree that cheap water is damaging the environment and resulting in excessive use by individual customers. We have a lot of good information on these issues, but the case hasn’t been made strongly enough.

Setting a price for water would require that we determine the objectives. Are we trying to reduce all types of water uses or just some types? Are we trying to shift water demand from less to more valuable uses? The environment tends to get somewhat short shrift from existing rules, which predate a modern scientific understanding of water needs of aquatic ecosystems such as streams, so reducing all types of demands could provide room for the environment.

We could decide to charge for residential water use only beyond some basic level, so that all people have access to enough water for efficient household use. Those who use far more drinking water than this base level would bear most of the cost burden. Focusing on driving down these excessive uses could create capacity for other uses.

We could deliberately favor certain types of water uses, such as indoor residential and commercial uses as opposed to outdoor uses, imposing a cost on the latter. Or we could charge for all water used, with the expectation that a higher cost will encourage conservation across the board, freeing supplies that could go to the most valuable purposes. Whatever the objectives, the price would be set at a level to achieve the objectives.

Sharing the revenue

How to use the revenue that results? A water charge would be intended to compensate the general public for use of their water resources, so the most appropriate uses would help protect the public-trust resource. Funding could be used for research to improve our understanding. Where are water resources limited? Is our water allocation system working well? Are additional water supplies possible? How should we better address environmental needs for water? Research, monitoring, and management costs would all fall into this category.

We could also better protect the quality and supply of water. For instance, the New Jersey Legislature for many years has considered a surcharge on water use to fund open-space protection. A water charge could help meet this need, specifically focused on the protection of water supplies so that the charge is directly related to the benefit. It also could support efforts to reduce existing pollution threats to water-supply sources, such as controlling pollution from stormwater discharges and land runoff. Funding could also be used help poorer households cope with the overall cost of water, through a household assistance program.

Finally, we could also use funds to help the public understand our water resources, how they are managed and used, whether current uses are sustainable, and future options for becoming more sustainable and resilient.

I’m not aware of any state that charges for use of the public’s water resources. There are states that collect excise taxes for the extraction of oil and natural gas, however. Water is even more valuable, even though it is priceless.

Is charging for the water itself, and not just the utility service costs, a good idea? There are good arguments for doing so. The primary argument is that by not charging, we encourage water waste. We can’t rely on utilities to set a better price signal, because then the utilities will be collecting money for use of the public resource, not the public. Our investor-owned utilities would not be allowed to make an excessive profit, and publicly owned utilities aren’t allowed to charge more than the cost of providing the service.

The second argument is that we haven’t funded management and protection of our water supplies at all well in recent administrations. Charging for use of the public water resource could provide funding for valuable efforts toward understanding, managing, and improving water resources.

The largest arguments against a water charge are that it hasn’t been done before and would constitute a new cost for water users. Policy tends toward inertia unless something happens that really pushes decision makers toward action, such as disasters or major threats. Few people want to be the first to try a major new approach.

Still, even without a new statewide water-supply plan, we know that many of our water resources are stressed, polluted, or both. We know that some areas use high volumes of water, especially for outdoor uses. We know that rainfall patterns have been changing in recent decades, and are informed that climate change makes further changes very likely. And we know that New Jersey has not done a sufficient job of funding water-supply research, management, and protection over the years.

Perhaps a package deal could address many or all these issues in a way that would place a real value on our water resources. However, my primary purpose here is to suggest that we carefully consider the damages caused by the fact that our water is without price, and therefore its value is not recognized.