When water is scarce, prices should go up

Record rainfall in Llano and Burnet counties in the Texas Hill Country cause major flooding in Marble Falls on Oct. 16, 2018. Photo by Bob Daemmrich for The Texas Tribune

The water shortage in Austin has took us all by surprise. Austin Water and the city clearly worked hard to try to restore the safety and volume of water that our growing city needs. Many businesses pitched in by temporarily closing to reduce water usage. Unfortunately, the urgent need to reduce water consumption was not adequately met, and we went without reliably safe drinking water for over a week. Efforts to bring consumption down to sustainable levels failed. What could we have done to prevent this situation?

The answer is to take advantage of the power of markets to allocate resources to where they are really needed.

Why, in the midst of this emergency, could we not bring water usage down sufficiently? Certainly no one needed to be watering their lawns. Is it really absolutely essential that we consume 120 million gallons a day of water? We suspect not.

And consider this: Even when water is scarce and most valuable, the price remains unchanged. We risk losing water pressure, which is essential for day-to-day activities and, crucially, for emergency services, but if a large commercial property owner doesn't want to bother turning off a sprinkler system, or if a downtown high-rise hotel wants to continue giving guests the option to wash their sheets and towels every day, these activities cost no more in a water shortage than when water is plentiful. Reductions in water consumption came from those users most willing to sacrifice to reach lowered water usage, not from those users who had the lowest value for the water.

In order to head off such crises in the future, we must put in place a system that allows the price of water usage to move with its current value. We already charge heavy users more per gallon than light users, and we need to allow the price, at least for the heavy users, to adjust as supplies diminish. No amount of pleadings, postings, or text messages will have anything close to the effect of a significant price change in order to reduce water consumption. This surge pricing could guarantee that we never again face the risk of losing essential water supplies just because heavy consumers lack incentives to cut down on usage.

While surge pricing is often controversial, as when firms like Uber can profit at times of very high demand or even crisis, in this case there is no such worry. Austin Water is a public utility, and any “profits" made from such pricing could easily be either returned broadly to customers as a conservation dividend, or perhaps even better invested in infrastructure to reduce the risks of shortages in the future.

Disclosure: The University of Texas has been a financial supporter of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations and corporate sponsors. Financial supporters play no role in the Tribune's journalism. Find a complete list of them here.

Carlos M. Carvalho

Executive director, CEPA, University of Texas at Austin

Richard Lowery

Associate Finance professor, University of Texas at Austin