Everyone who passed Econ 101 please take a step forward---not so fast, City Council of Roseville!
The city of Roseville has already declared a "stage one" drought alert, and is considering a drastic step to ease the crisis: Offering residents cash to give up their lawn.
Fifty percent of all the water that's used by homeowners in Roseville is for watering lawns. The city is considering giving residents up to $1000 to tear out the grass and put plants, rocks and mulch in its place.
If only there were some simple mechanism that efficiently rationed resources by conveying information to consumers about that resource’s scarcity and consumers' preferences for it--wouldn’t that be a wonder!?!
“Wait a tic, that wondrous mechanism seems an awful lot like an everyday market price!“ cries out Fig.
And right you are Fig. The fact that the Roseville is in a “stage one” drought and 50 percent of water is still used for lawn watering indicates that the price is artificially low, for unless Roseville citizens are inordinately fond of their lawns, the high price of such scarce water would certainly have compelled them to cut back on their use of it for such trivial purposes.
The price of water might be too low because the market is failing take account of a negative externality, or it might be because municipal water is priced by government decree rather than supply and demand, or it might be both. In any case, the most efficient policy would be to “get the price right,” either by letting the utility charge a price reflecting market conditions, or by passing a tax that raises the price to the best estimate of the market-clearing level. This increased price will signal individuals to reduce their consumption, and best of all, allow them to choose for themselves the best way to do it, rather than having city council impose a one-size-fits-all solution. It’s worth keeping in mind that no government council told Germans to take 3-minute showers—it’s simply a rational response to the most expensive water in the West (Germans of course claim their short soaks are a result of their eco-friendliness).
If Roseville's residents responded to high prices like the Germans they might not smell as sweet, but then again, that might not be as important to them as a pristine and well-irrigated garden--full of rosebushes, perhaps?