Want Water? Pay the Price: An Interview With Aguanomics’ David Zetland


We’re in a water crisis.

Before I talked to economist and creator of Aguanomics David Zetland, those two words–water + crisis—made me scratch my head.

I’ve visited developing countries with water problems in the past. In many of those places, water trucks refill tanks located on the tops of buildings, and consumers have to haul their daily dihydrogen monoxide home in buckets. Here in the States, however, there’s plenty of water flowing from our taps. All the time.

According to Zetland, that illusion of plenty–endless water flowing from our taps–is part of the problem.

Business Pundit interviewed Zetland, who was recently been featured in Forbes and on Fox Business News, to get a primer on the water crisis—and how to solve it. Below are notes from the interview.

(Ed.: I organized these by category rather by Q&A. This is basically a transcription)


Our demand for water often exceeds supply. When that happens (as in Las Vegas and Atlanta now), a small imbalance can inflate into a crisis.

What do we mean by crisis? If a watershed is storing less than a year’s worth of water, groundwater is falling fast, and rain isn’t coming, it’s a crisis.

In situations like that, people MUST change their consumption behavior if they want to be able to live there in 2-3 years.


Las Vegas has been on the edge of crisis for years
. Although the city is one of the most efficient water users in the country, its major water source is close to depletion. Vegas is trying to get more water by building an aqueduct to bring groundwater from rural Nevada, but that solution is neither sustainable (Vegas will be mining the water) nor ecological (the exporting area will lose its water supply).

Demand from metropolitan Atlanta is also causing trouble for neighboring states in the Southeast that claim Atlanta is taking more water than it should.

Southern California
gets its water from the Colorado River and northern California. The region is in a bad drought. If it doesn’t rain this winter, red lights are going to be flashing even brighter.

Most of the Colorado River Basin is in a drought
, and it’s not getting better. Colorado’s Front Range, where Denver is located, doesn’t have much water. Denver and other areas import water from the other side of the Continental Divide using a tunnel bored through the Rockies. Water exporting areas are worried that their future is flowing into that tunnel.

In all of these areas, it’s necessary to make changes in the way water is managed. If we don’t make changes, people and businesses will suffer from less-reliable water supplies (rationing!), farmers’ water will be seized (emergency!), and the environment will be screwed (dry riverbeds!).


Back in the old days, there was enough water for everyone. Cheap water was (and is still) used as a development tool. Landowners love cheap water: It makes worthless land valuable. Governments love it because development brings tax revenues and power.

The first programs gave water to farmers who settled on the frontier. As frontier areas developed, the demand for water grew, but there wasn’t enough. The government got more ambitious – developing water for agriculture through megalomaniacal engineering projects. People wanted to reshape the West, make flowers bloom in the desert. (ED: For example, the Central Valley Project (CVP) delivers water to California’s Central Valley, a semi-arid desert. It provides half the water for the agricultural industry there, which accounts for about 2-3% of gross state product. It’s also heavily subsidized.)

Urban demand grew at the same time around this “enough water for everyone mentality.” For example, the Southwest is now home to millions of people who depend on imported water (and air conditioning!). You can find similar examples of unsustainable living in the Middle East, tourist resorts on islands, and, most recently, in China.

These crises result when too many people and farms exist in areas not naturally capable of supporting them. After many decades of “hydro-growth,” people are unprepared to change their lifestyles. Meanwhile, supply becomes increasingly stretched–until it snaps.



Although “The People” own the water, farmers own most of the rights to use that water. In the US, agriculture consumes about 75% of the developed water supply, with the rest going to urban areas.

Farmers’ water rights are strong, but they can be of limited use. Although some farmers might prefer to “farm water” (sell water to cities), they are often prevented from doing so.

Some laws state, for example, that a farmer who does not use his water will lose his rights. It’s in situations like this that we see farmers flooding the desert to grow grass while municipal water providers are fighting to get water for their customers.

Even worse, farmers with vague rights may face shortages or rationing. Shortages can result when too many farmers tap the same aquifer (too many straws in the glass); rationing may result when imported supplies are cut. Farmers who can’t get water at any price may have to cut down an avocado orchard to keep remaining trees from dying of drought.


Although agricultural and urban water supplies are managed in different ways, they come from the same sources. When these sources are under stress, water supplies need to be managed in different, but interdependent ways.

Zetland proposes that wholesale auctions be used to allocate water among urban, agricultural and environmental uses. After that allocation, he proposes that urban areas use “conservation pricing” to limit demand to available supply. Agricultural users, on the other hand, have the capacity to allocate their water supplies through a second set of auctions. (Environmental water presently just flows down the river…)


Note that wholesale auctions would only sell sustainable quantities of water, so that (minimal) environmental flows and aquifers are maintained. (Environmental interests may want to buy more water for “restoration” or “augmentation” at auction.)

By a sustainable yield, we mean that there’s no water shortage if what goes out equals what comes in. If you sink a well and take water out at the same rate it comes back to surface, that’s sustainable. If you take water out faster than that, you’re mining water, which means that your renewable resource disappears and the land is uninhabitable.

For more on wholesale auctions, see Zetland’s site.

Why auctions? Because they are the easiest way to ensure that water reaches its highest and best use. Consider these facts:

Farmers pay $20 per acre/foot of water (that’s an acre of land covered a foot deep in water).
A single person consumes 1/8 of an acre/foot per year.
A single person pays $1000 per acre/foot of water.
Farmers own 75% of the nation’s water supply.

Moving water from agriculture would increase water supplies for urban dwellers, at a market-appropriate price. Some farmers, for example, can make more money selling water than farming low-value crops like alfalfa, hay, or cotton. The water they own would be put on the market, and consumers, other farmers, industries, businesses, etc. would compete for that water in an auction. Of course, a bidding war for water is likely to increase prices – and higher prices will signal that water should be treated as a precious resource.

Conservation Pricing

From Zetland’s Forbes editorial:

I propose a system where every person gets the first 75 gallons, or 1.5 bathtubs, per day for free but pays $5.60 for each 75 gallons after that. Under my system, the monthly bill for the average household of three would come to $95.

Most families will respond to higher prices by using less, so their bill will not be three times today’s low price. (Those who use less than their “lifeline” allocation will pay nothing at all.) As higher prices reduce the quantity demanded (a la $4/gallon gas), water supplies will stretch farther.


If we had a reasonable price on water, we could have a sustainable water supply everywhere, forever.

People will have 100% reliability IF they are willing to pay. If businesses want reliable water, they pay. If poor people want to use water for more than drinking and sanitation, they pay. If a guy wants to irrigate his golf course, he pays A LOT.

The food supply would shift to higher value crops (less alfalfa and more broccoli). Food prices would go up, but they would reflect the true cost of growing food, not the subsidized cost from unsustainable practices.


Zetland is working with farmers to test auctions for reallocation of water within irrigation districts. He is also pushing for urban price reform (he says the tide is going in that direction). One driver for urban price reform is political necessity: Cities won’t be able to approach farmers until they are efficiently managing their own supplies.

The general population has mixed reactions to his proposals. Although some think that water should be subjected to even stronger market forces, the majority find it hard to put a price on water.

Water is a very emotional subject for people,” he says. “They don’t want to use markets for allocating water, but if they don’t there won’t be any.”

David Zetland, PhD, is a S.V. Ciriacy Wantrup Postdoctoral Fellow in Natural Resource Economics and Political Economy at UC Berkeley. His blog is located at Aguanomics.com.

  • Drea-

    Fantastic post. I have one problem with Mr. Zetland’s comments…and there were plenty of them, man this guy likes to talk. Anyway, through all of this guy’s verbal masturbation, he never explained the root to the water issue in areas such as Las Vegas, the middle east, and parts of China and that is….because you live in the $#($* desert! Nothing grows in the desert! – Thanks Sam Kinison

  • Don

    Hey wait a minute! I run my stock on alfalfa and you liberals are gonna run me out of business with more expensive feed.

  • “Sam” — Although deserts are natural places for “water problems”, I am pointing out that mismanagement is making problems where there should be none (e.g., the South East). If prices were “correct” in ALL places (deserts, swamplands), then population distribution would reflect water supply instead of bureaucratic fiat.

  • “Sam” — I meant Robert… :)

  • Philip

    Although I agree with David on many things, these “facts” are partially true but inferentially false:
    >>Farmers pay $20 per acre/foot of water (that’s an acre of land covered a foot deep in water).
    A single person consumes 1/8 of an acre/foot per year.
    A single person pays $1000 per acre/foot of water.
    Farmers own 75% of the nation’s water supply.<<
    1) Very few farmers pay $20 per acre foot in California. Many pay over $500, and for less than they need. The average is probably $70 or more.
    2) A very frugal person might consume 1/8 acre foot per year, but only if he is extremely careful, and does not eat. Not eating will reduce water usage dramatically after 30 days or so.
    3) Municipal water costs include an extensive delivery and sewage system, treatment, and infrastructure for 24 hour instant availability at safe pressures. It is unrealistic to compare that to agricultural systems.
    4) Farmers own 75% of the *developed* water supply, not the *total* water supply.

    Alfalfa is more valuable than broccoli, by the way (both in an aggregate economic sense and on the basis of on-farm returns per acre). I have a choice to grow either one, and I behave rationally, and plant alfalfa.

  • Philip —

    Let’s go over your facts and see what emerges. Say that farmers pay $70/AF and urbans are willing to pay $1,000/AF — do you see an arbitrage opportunity?

    The point was NOT that treated/distributed water costs more or less or that one crop is worth more or less but that ag uses are less valuable that urban uses.

    BTW — urban areas are happy to pay $200-300/AF and THEN add treatment/distribution costs. $500 (or $1,000/AF) for ag is rare. I actually don’t care about who pays what price — I prefer that ag and urban face the SAME price. We’ll still have farms and urban areas will get a better water supply.

    Other things: Sewerage is another matter/market. Developed supply is relevant if we’re talking about allocation. Alfalfa v. broccoli was an example of high vs. low-value crops — grow what you want IF you pay market prices for water.

    Good points, overall :)

  • Don —
    1) I’m not a liberal. I’m an economist.
    2) Assuming you are a conservative, surely you believe that you should get the market price for selling your livestock AND that you should pay the market price for your inputs (feed, water). If not, you’re just another big-government liberal type who wants other people’s money. :)

  • Philip

    I am with you entirely in agreeing that markets are the fairest and most efficient way to allocate water. There certainly is an arbitrage opportunity for agricultural water districts to sell water to urban users, and some do, although there are still primitive cultural resistances, and several real legal issues interfering with the process (to say nothing of the infrastructure needed, which could be paid for in the market but has yet to be built). I mentioned sewage because most urban water utilities recover their sewage costs through the water use fee (part of the $1,000 annual bill).
    Urban users don’t have an appetite for anything like all of agriculture’s water, anyway. I recon at the most something like 5 million acre feet per year would satiate the demand, and, if the price farmers received was sufficient to pay for improved infrastructure, there would be little disruption to rural employment, property taxes, etc. in the selling areas. Obviously there would be a net economic gain to society, as in all market clearing transactions.
    At some point, we do need to consider that if we really reduce agricultural output, the stuff grown in California would have to be grown elsewhere, at God know what environmental and human cost. I think we can have functioning markets and retain most of our agricultural output, but only if we are careful, and respectful of each other. The Dismal Science can scare the pants off some old farmers, and needs to be fed to them slowly so they can understand the benefits.

  • David,

    Don’t disagree with you on the mismanagement issue. I think trying to live in place that provides none of THE key element of life is silly and to force that issue on good ol’ Mother Nature….well, you deserve what you get! As far as the econ stuff, I’m a dumb marketing guy os I leave that to the people that got all the gray matter.

    It’s all about education…and pain threshold. Meaning, as long as I walk into my kitchen and water comes out, I am good. But let there be a day that I turn on the faucet and nothing happens, all of a sudden water is a big deal.

    I read in an interview with Indra Nooyi, CEO of Pepsi, that she felt guilty every time she ran a bath, considering her and her brothers had to walk six miles each day as children to bring water home. Let that happen here and I am falling on the ground crying while I slowly turn into jerky.

    Nice story, both of you!


  • Bob, first, nice “verbal masturbation” quip. You might be projecting, but you certainly aren’t walking your own blog’s talk on netiquette.

    “I think trying to live in place that provides none of THE key element of life is silly and to force that issue on good ol’ Mother Nature….well, you deserve what you get!”

    I happen to live in Japan, which has almost no natural resources but a wealthy economy. Why? Because they use markets to buy what they need from others who want to sell and to produce sophisticated products that others want to buy. David is obviously correct that the real problem with water in the US is that there are only rudimentary markets in it, and that we can improve our living standards and cut down on political disputes over resources like water by (1) clarifying property rights, (2) allowing those who own water rights to sell them to people who value them more than they do, and (3) getting the goverment out of the water infrastructure and disrtibution businesses – or at least to price water more closely to the marginal costs of acquisition.

  • Philip

    Hear, hear Tokyo Tom!

  • “How Did This Happen?”

    It is very simple: 1-2% population growth, every year, year after year, has caused the human population of the planet to skyrocket from 600m in 1700 to 6.7b only 308 years later.

    There is *no way* to secure a “sustainable” water supply (or any other type of resource) for a population that is growing exponentially without limit.

  • TokyoTom-

    Sorry if the line offends you…my apologies, I use it in a bombastic way to reference someone that talks….a lot…like myself, so no harm intended. I would like to address your comment however if I could. You said “I happen to live in Japan, which has almost no natural resources but a wealthy economy.” Can I mention Tom, that you are surrounded by water? Not only that, but Japan is building the world’s largest desalinization plant ever! So when you say resource poor, I can’t exactly agree when it comes to well…water. I also assume you are going to drink this water, considering there isn’t much farmland to speak of, so that is how Japan is going to address their water needs going forward.

    I also think water IS priced closely to the marginal costs of acquisition. That’s not the issue, it’s getting water to places that people need it because it is not produced locally, right? I mean in some respect, it’s no different than producing food or clothes, if it is labeled “not made here” its gotta come from somewhere.

    In other words, I have no trouble getting water locally in Philadelphia, nor do you have real issues getting it in Japan, getting it in Las Vegas, India, the Middle East, and Africa is a real issue that needs to be addressed. Problem is, we are not making more of this stuff, and it is going to take a back seat in people’s consciousness as long as the U.S. is struggling with a tanking economy, $5 a gallon gas, a housing market that has collapsed, and a financial sector that is reminiscent of the Japanese banking sector of the 80’s.

    Guys like David need to talk a lot, in fact they need to talk a lot more. Why? Because small changes creates big ones. Like the butterfly whose flight stirs up the winds that create a hurricane 2000 miles away, it takes small steps first.

    I ripped into the story because of my ignorance to the issue in that it isn’t anywhere close on my radar screen. I have much bigger things to worry about that are real, right now, looking me right in the eye. Am I right? Of course not, but you can only fix one worldwide crisis at a time.

  • @Stalky — (1) you need to study up on population dynamics. Start here: http://en.wikipedia.org/wiki/World_population. You will not that the growth rate is not exponential but logarithmic, which is another way of saying that it’s going to peak.
    (2) Resources do NOT run out if their price rises with scarcity. My point about water pricing is that we need to raise prices if we want people to use less and/or stay within a sustainable consumption.
    (3) Although water is (nominally) a renewable resource, even non-renewables (oil) will be around in 1,000 years if the price rises fast enough. Physical quantities do not matter if institutions are right/wrong.

  • I officially resign from this post. David you are way too smart for me, and anything further from me, will indeed prove my stupidity! Better to keep your mouth shut and be thought of as a fool, than to open it and remove all doubt. Although, I am afraid that that moment in time for me may have past!

  • Infogleaner

    In the future you will pay more money for less water, or more money for the same amount of water.

    Which would you prefer?

    It seems like a no-brainer to me. Jack up the price of water and use the excess to get more water supplies.

    In southern California, we’re right next to a giant ocean full of water. Spend the money to desalinate.

    Don’t like that? Every river and creek in San Diego County that drains into the ocean is a water waster. When it rains (and it sometimes does), those little creeks are torrents, pouring fresh water into the ocean. Why not sequester it? It’s a lot easier to clean than salt water.

    Mega-projects. Back when our country had the focus to do great things, we made Hoover dam. Build a water pipeline from the mouth of giant rivers to the north and grab JUST A PORTION of what gets dumped into the ocean.

    There’s no end of solutions. Sadly, the only solutions being forwarded are how best to control people’s lives. Imagine the power of the future water lords, who dictate 2 gallons of water per person per day. Don’t like it? Tough! There’s a fish in the Sacramento delta that’s worth more than you and your families.

  • People will have 100% reliability IF they are willing to pay. If businesses want reliable water, they pay. If poor people want to use water for more than drinking and sanitation, they pay. If a guy wants to irrigate his golf course, he pays A LOT.

  • N.R. Carlson

    Infogleaner – there are biological/ecosystem costs to damming rivers and stopping water from flowing to the seas. As said above, if we do not assign real costs to our activities, we are just trying to greedily grab resources from someone else, in this case the natural world.

    I believe that I read recently about a project in Orange County which was reclaiming potable water from the sewerage stream – this seems a better option in many ways, requiring less energy that desalination, reducing the volume of the wastewater stream, and recycling usable water back to the tap?

  • Infogleaner

    Yes, N.R. Carson, that’s the kind of solution I’m talking about. We should be cleaning our waste water stream and reclaiming as much as we can.

    There are indeed ecological costs on damming rivers. Just as there are dire consequences to civilizations denied adequate water supplies.