Water at a Price

When resources are used to yield the largest possible net benefits to society, economic efficiency has been achieved. In agriculture, manufacturing, and even in service industries the particular mix of inputs determines the cost of the product. Because in many of its uses water costs the private user little or nothing even when the social cost of providing it is high, its contribution to net costs or benefits can vary widely depending on whether the calculation is made from the standpoint of the user or of society.

If an appropriate price reflecting the costs of water development is attached to the use of water, including waste disposal services, then water will be combined with other resources in such a way as to minimize the social cost of the product or service. A brief look at some of the areas in which water is indispensable will clarify this idea.

• In thermal-electric generation, the waste heat produced in generating electric energy from fossil or nuclear fuels must be transferred to some sink, which is usually a river, lake, bay, or estuary. The capacity of the water to assimilate waste costs the power plant nothing. But the resulting temperature increase may impose costs downstream stemming in lowered dissolved oxygen and fish kills. (In some circumstances it may provide benefits, e.g., in stimulating fish production.) The effective price of water use, in terms of a waste assimilation service as a component of production, does not reflect these costs. Consequently, many private and some public plants continue to make excessive use of the water body when, from a social point of view, they should be increasing the use of heat dissipating methods such as cooling towers.
• In irrigated agriculture, water can be "saved” in many ways: for example, through careful supervision of water application, through use of canal and lateral lining, and through sub-irrigation, tailwater recirculation, and improved drainage systems. But whether any of these measures are undertaken depends on their costs and on the price of water to the irrigator. The cheaper the water, the more it is likely to be applied. If a senior appropriative right permits nearly costless diversion from a nearby stream, there will be little incentive to conserve water unless there is a ready market at a good price for unused water. The effective cost to the user is zero, but the cost to society is the net value of output which could have been produced had some of the water been available to other uses.
• In navigation, the use of water is not costless if, in the interests of navigation, other valuable uses are forgone. This is the case on some major river systems, particularly the Missouri and the Columbia, where releases of storage water to maintain navigational depths compete directly with releases for power, irrigation, and improved water quality. Because a barge tow operator pays nothing for the use of a waterway, navigation demand—which is measured by volume of traffic—is excessive: waterways are congested and traffic is diverted from other, often more efficient, means of transport.
• In industry, water intake and waste disposal are both primary factors in the production process. And, as with irrigated agriculture, substitutions can be made among the other relevant factor—labor, machinery, power, raw materials other than water—to achieve a desired output of goods and services. Just as underpriced labor or power results in their excessive and uneconomic use, so underpriced water at the intake and underpriced waste assimilation services at the effluent end result in excessive demand. To illustrate, when a region's water resources development is being planned the agency responsible must estimate the amount of water an industrial user is expected to withdraw from a stream. If the price at the user's intake is assumed to be zero, the amount withdrawn may well be large. The cost of providing this water at the intake by means of upstream storage reservoirs may be larger, smaller, or much the same as the cost of providing it through in-plant recirculation. When such costs were compared for the Lehigh portion of the Delaware River basin, an in-plant recirculation method was found to cost about 30 percent of the reservoir alternative. In a study of copper operations in Arizona, the cost of recirculated water ranged from about equal to as low as 10 percent of the cost of new intake water.
• In each of the cases discussed above incorrect pricing of water and of its waste-assimilative services leads to economically inefficient methods of production and to uneconomic demands for water.