Could the Free Market Solve California’s Water Management Issues?

California is in the midst of a water crisis that threatens to do enormous damage to the economy and ecology of the state. In response, Gov. Jerry Brown recently signed an executive order requiring a reduction in water use, along with subsidies to convert 50 million square feet of lawns and turf to “drought-tolerant landscapes.” But neither this, nor the $7.5 billion water bond approved by voters in November, will solve the underlying problem.

California needs an efficient and inexpensive means of determining the actual amount of water allocated to each rights holder. Since rain and snow varies from year to year, such allocations would ideally be shares of the total precipitation, rather than absolute amounts.

The Sunshine State should follow the example of Australia, which dramatically reformed its water laws in the 1990s.

– California should change its “beneficial use” requirement so that rights owners may store their water. Currently, they must use it or lose it.
– Restrictions imposed by state and federal agencies on trading water must be eliminated so that water can be put to its highest-valued uses.
– Water storage and transportation infrastructure owned by state and federal governments should be sold or leased to private companies or nonprofits that have stronger incentives to ensure the infrastructure is maintained, improved and used to store or move water where it is most highly valued.
– Municipal water agencies could be converted into private, mutually owned companies. Prices would then be determined by the shareholders, i.e. water users, and would better reflect both scarcity and supply costs. Consumers might then choose to use less water but would not be forced to do so.

It is clear that central planning will not fix California’s water crisis. It is time for the state to follow Australia and adopt a more sustainable approach: Allow markets to work, and bottom-up solutions will quickly emerge.

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