The economics of water scarcity is crucial to sustainable water management, particularly during droughts. California has long benefited from the insights of economists, though their ranks in state water agencies are thinning. Luckily, California has a wealth of young, talented economists already active in public water policy and who will be around for future droughts. California WaterBlog asked five of them what California should be doing to prepare for a fifth year of drought and beyond.

Get inside consumers’ heads

By Kurt Schwabe

Does a lawn use more water than a pool? How much water will be saved by replacing turf with drought-resistant landscaping? Will it be cost-effective? What will be the effect on residential water use if a water agency incentivizes customers to use water more efficiently (adopts a budget-based tiered water rate)?

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It depends. That is, these questions are difficult to unpack since they are intricately tied to human behavior.

For example, the degree to which drought tolerant landscaping saves a household water relative to turfgrass will depend on, among other factors, how they irrigated their lawn before and after replacement. Alternatively, the relative water use of a pool versus turfgrass also will depend on, among other factors, their irrigation habits prior to installing the pool. Unfortunately, restricting water use to fewer days a week – as some research shows – doesn’t necessarily save water, nor does refilling one’s pool every other day rather than every day (as one customer tried to convince me of during a recent trip to the barbershop).

Historically, California’s management of severe drought has centered on engineering solutions. In the current drought, however, understanding human behavior and the demand side of water management is beginning to share the center stage.

Forward-looking water agencies are overcoming the stigma that investments in understanding human behavior are somehow less worthy than augmenting water supply in addressing drought. Indeed, these agencies are systematically evaluating numerous ways to improve demand-side management through analyses that identify:

  • Factors determining participation in conservation programs
  • Factors influencing residential water demand
  • Effectiveness of price and non-price conservation programs
  • Revenue and cost implications of alternative conservation options
  • Possible synergistic effects across conservation programs

Such efforts can lead to more informed, targeted and cost-effective conservation programs.

Kurt Schwabe is associate professor of environmental economics and policy at UC Riverside.

Increase role of water markets

By Katrina Jessoe

Economists have long recognized well-functioning water markets as a valuable tool for reducing the economic costs of drought.

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They involve voluntary transfers of water between parties, usually from higher priority to lower priority water-rights holders, at a negotiated price. They offer an opportunity to transfer water from lower value to higher value uses, regardless of whether those uses are for agricultural, urban or environmental purposes.

Water transfers in California have been occurring since the 1976-77 drought, but their role in managing droughts should be increased. Reducing transaction costs and expanding groundwater markets could do this.

The former does not imply that the environmental impacts of transfers should be ignored. Environmental costs are real and should be taken into account before approving a transfer. However, the current transfer process is cumbersome and drawn-out. A more streamlined approach could reduce transaction costs and encourage market activity.

The recently enacted Sustainable Groundwater Management Act, requiring local agencies to manage underground pumping and recharge sustainably, may encourage groundwater banking and borrowing.

Groundwater markets would allow for trading to occur over time with increased pumping during times of scarcity and the replenishment of aquifers during wet years. These transfers would introduce further flexibility in managing water resources.

 Water markets will not prevent droughts but they offer a feasible and flexible pathway to lessen their economic costs.

Katrina Jessoe is assistant professor of agricultural and resource economics at UC Davis.

Tiered water pricing works – and it’s legal

By Kenneth Baerenklau

What happens when there is a disruption in the supply of oil or some other commodity? The price tends to go up and demand tends to go down. The demand for water is no different.

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There is an abundance of empirical evidence demonstrating that consumers reduce their demand for water in response to higher prices. In the residential sector, demand tends to fall by about 4 to 6 percent for every 10 percent increase in price (albeit with significant variability across circumstances).

But the difference between water and other commodities is that the prices charged by water agencies typically aren’t very responsive to disruptions in supply. That is, when water becomes increasingly scarce, prices don’t necessarily rise to reflect this scarcity, and thus demand doesn’t fall.

There are some good reasons for maintaining price stability related to the essential nature of water and the lack of good substitutes. But pricing nonetheless remains a very effective tool for managing water demand.

A recent court decision in an Orange County case may have left the impression that a particularly popular and effective “tiered” approach to water pricing is unconstitutional in California.

On the contrary, the court stated clearly that tiered pricing is not unconstitutional and furthermore makes good sense. Debate remains over the types of costs that can be passed on to customers as higher water prices. Californians nevertheless should expect their water suppliers to rely more heavily on pricing to achieve conservation goals as this drought continues, and even more so when the next one comes around.

Kenneth Baerenklau is associate professor of environmental economics and policy at the UC Riverside School of Public Policy

Keep closer tabs on crop water use

By Josué Medellín-Azuara

Agriculture in California, as in many other parts the world, has the lion’s share of water use. The industry uses 80 percent of the water consumed in the state in a normal year. Yet the state’s method of tracking all that water use has not kept pace with the needs of modern water management.


Estimating farm water use requires data on cropping patterns, land use, water deliveries and irrigation methods. At best, this information is available annually. It takes county agricultural commissioners and state agencies that long to collect it.

Effective water management calls for timelier water-use accounting, especially during droughts.

Modern measuring methods using multispectral satellite imagery make it possible to estimate farmers’ “consumptive” water use — the amounts of irrigation water crops transpire and evaporate from the nearby soil.

Consumptive water-use estimation using satellites in combination with ground-level weather data and land-use surveys can greatly improve the timing, accuracy and effectiveness of this information.

Other western states use this remotely sensed measurement technology to quantify consumptive use and manage their water rights system. The technology is relativelyinexpensive (just cents per acre in Idaho).

A consortium of federal and state agencies can make this endeavor possible. A concerted effort to organize, document and distribute this wealth of information is needed.

Josué Medellín-Azuara is a senior researcher specialized in hydro-economic modeling at the UC Davis Center for Watershed Sciences

Monitor and manage our groundwater

By Duncan MacEwan

The ability of California growers to offset shortfalls in surface waters supplies with increased groundwater pumping is critical to avoid costly crop losses during droughts. Growers pumped an additional 5.1 million acre-feet (maf) of groundwater in 2014, offsetting 75 percent of the surface water shortage that drought year.

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But mining groundwater this way carries costs that undercut agricultural productivity in the long run.

Pumping groundwater water faster than nature replenishes it results in depletion of the groundwater in a basin. In the last decade, California’s Central Valley overdrafted its groundwater reserves by more than 20 maf. Average annual overdraft ranged from 0.4 maf in average water year conditions to more than 1.4 maf in dry years [1].

The standard cost of groundwater overdraft is the additional energy required to pump from a lower water level. But there are two additional, and perhaps more important, economic costs: the buffer value and stranded capital costs.

The buffer value is the value of having groundwater stored and available for use during drought years. It is reflected in the ability to irrigate higher-value crops in dry years by planting fewer acres of lower-value crops in wet years. The stranded capital cost is the present value of the remaining useful life of assets such as wells and orchards that were lost during drought as a result of insufficient groundwater.

California’s Sustainable Groundwater Management Act of 2014 paves the way for conjunctive rather than extractive groundwater management. That is, groundwater pumping may exceed the natural rate of recharge during dry years, but must be replenished in wet years to avoid additional economic costs.

The current drought has highlighted the value of our groundwater reserves to agriculture. We have learned that we must monitor and manage our groundwater to preserve the marginal pumping cost, buffer value and stranded capital costs. The new groundwater laws move us in that direction.

[1] Author’s calculations using DWR’s C2VSim model data.

Duncan MacEwan is managing partner at ERA Economics in Davis, Calif., specializing in water resources and agriculture.