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🔬 Groundwater Trading in California

(don't) Waste Water!

Photo by Daniel Sinoca / Unsplash

Table of Contents

Host: Antoine Walter
Guest: Ellen Bruno | Extension Economist | UC Berkeley
Category: 🔬 Research

Podcast’s Essential Bites:

[6:51] “Oftentimes, when I'm thinking about water markets and water trading […] it's in context where we need to restrict the amount of water use […] relative to the status quo. And so if we have to restrict water use, that's tough on the water users. […] Water trading […] [helps to] make that transition to a restricted environment easier. We have to cut back. And how can we do that in the least painful way possible? And that's by taking the scarce resource and using it in the most efficient way amongst those who are using it. And by facilitating trade, by having a market, in theory we can get to this allocation of a scarce resource that maximizes the benefits to society.

[11:10] “For the most part in California, in many places groundwater isn't metered and so it isn't monitored in how much is being extracted. And then on top of that, it's rarely priced. So groundwater pumpers will pay whatever it costs to extract the groundwater from below, like those electricity costs from their pump. But it's not like the irrigation district is charging an explicit price for that water on top of those pumping costs. And so that makes it really hard. If you're interested in studying a market, for example, and you want to know what the demand curve for groundwater looks like, it's very hard to look at any data and try to get a sense of what does that demand curve look like when prices don't even exist.”

[14:32] “In my paper, I'm looking specifically at the price elasticity of demand for water. We have an intuition […] about demand curves where you know that if the price goes up, the amount you'll demand of any good goes down. […] The price elasticity is a parameter that characterizes this relationship. It tells us how sensitive we are to a change in price. So for example, if the price were to increase by 10%, how much consumption would go down in percentage terms? And so this is important when we're thinking about sustainability policies for water if, for example, suppose a regulator wants to encourage a certain amount of conservation of water, and they want to set a price in order to do that, how high of a price would they need to set in order to incentivize a certain reduction in pumping? If you don't know anything about this relationship, it would be really hard to design that kind of policy.

[17:35] “When thinking about the sensitivity to price of urban residential water users, I think it's also important to keep in mind that a lot of the water that's being used isn't necessarily for those essential water needs, like drinking and bathing. Irrigating lawns, for example, that outdoor water use is a huge portion of urban and residential water use that is much more elastic than the component that is essential that's actually relatively small within that.”

[26:14] “Part of the reason why economists like talking about markets as a solution to achieve an allocation that is best for everyone, is because regulators who are trying to manage this resource don't have perfect information about how individuals value the resource. And not to mention that those valuations change over time. And we live in a very dynamic environment […]. So in theory, you could imagine an allocation of water across the water users that was perfectly right for each individual person, that maximizes the value of that water to society. But it's unlikely that the regulator would know that or be able to get to that. And so […] that's where the market mechanism comes in. We can give any allocation and if we could facilitate trade, and every individual knows how badly they want the water, or how much they are willing to sell it for, then we can arrive at that allocation.”

Rating: 💧💧💧

🎙️ Full Episode: Apple | Spotify | Google (Original Title: "Can Groundwater Trading help California save $580 million per year?")
🕰️ 47 min | 🗓️ 02/02/2022
✅ Time saved: 45 min

Additional Links:
Ellen M. Bruno and Katrina Jessoe. (2021). “Using Price Elasticities of Water Demand to Inform Policy.” Annual Review of Resource Economics 13.9: 1-15.