For years we have been hearing about a water shortage in the western states. To most people, that might suggest that there just is not enough water for all the people in those states. But, when an economist hears the word "shortage," it has an entirely different meaning.
What specifically is a shortage? It is a situation where you are willing to pay the price but simply cannot find as much as you want. To an economist, the question is: Why doesn't the price rise then? If it did, some people would demand less and others would supply more until supply and demand balanced.
Put differently, a shortage is a sign that somebody is keeping the price artificially lower than it would be if supply and demand were allowed to operate freely. That is precisely why there is a water shortage in the western states.
Even in California's dry Central Valley, less than 10 percent of the water available from federal water projects is used by cities and industries. The vast majority of it is used by farmers, who pay a fraction of what urban users pay, thanks to federal price fixing.
Like everything that is made artificially cheap, water is used lavishly, including the growing of crops like cotton that require huge amounts of water. It is one thing to grow cotton in Southern states with abundant rainfall. It is something else to grow it out in a California desert with water supplied largely at the taxpayers' expense.
The long-term contracts under which this ridiculous arrangement goes on expire this year, so theoretically these contracts could be renegotiated so that everyone who uses water supplied by federal water projects has to pay his own way and cover the costs of the operation. Alas, this is an election year, so you can bet the rent money that no such thing is going to happen.
A Department of the Interior spokesman explains it this way: "We don't think it is a good idea for California or the nation to adopt punitive pricing proposals that might have the effect of driving more agriculture out of existence."
Isn't that a lovely thought? Apparently the only people toward whom the government can be "punitive" are the taxpayers.
We live in what is often called a profit system but, as Milton Friedman explained long ago, it is really a profit-and-loss system. The losses are just as important as the profits, though not nearly as popular.
Running up losses because you are using resources that are more valuable somewhere else is precisely what forces you to stop the waste. If you are too stubborn to stop, then you will get stopped by bankruptcy.
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