When the well’s dry, we know the worth of water.
– Benjamin Franklin, Poor Richard’s Almanac, 1746
The problem with water, many economists say, is the fact that it is essentially free.
That may come as a surprise to you if you receive a monthly bill from your local water utility. But the economists are technically correct. In most places in the world, we pay only for the cost of delivering the water to our homes or businesses, i.e., the cost of electricity to push it through distribution pipes, clean out impurities, or to construct a reservoir to store water. The water itself is free.
Because the water itself doesn’t cost anything, its price doesn’t go up when water supplies become scarce, such as during the droughts that are now wreaking havoc in the bread baskets of the U.S. and Russia, in the heart of Africa centered around Zaire and Uganda, or across India. In the language of economists, water lacks a “price signal.”
As a result, our use of water is free of one of the most powerful constraints on human behavior: its expense.
We’ve all witnessed the power of a price signal when the cost of gasoline rises at the local filling station. Gasoline consumption drops sharply. High gasoline prices are so powerful that they can drive up sales of hybrid and other gas-efficient cars.