by Pete Geddes

Created on: April 16, 2008   Last Updated: April 19, 2008

Here's why we should be worried about running out of fresh waterin most places around the world it's freepriced at zero. Any resource priced at zero will be wasted. Environmental and social problems follow. Here's one example.

The Ogallala Aquifer underlies 225,000 square miles in Texas, New Mexico, Oklahoma, Kansas, Colorado, and Nebraska. Use of the aquifer began a century ago. After World War II, the withdrawal of groundwater surpassed the aquifer's rate of natural recharge. Some places have already exhausted their underground supply. Aside from pumping costs, water is free. Most of it irrigates corn, which is used for livestock feed.

A water-intensive crop, corn is generally not well suited to the ecology of the High Plains. But huge subsidies to growers, combined with cheap water, create little incentive to transition to more drought-tolerant crops, such as sorghum. (The same pathology allows rice, a monsoon crop, to be grown in California, a desert state.)

There is a water crisis. It's not an absolute scarcity of water, but rather a crisis of managing water so badly that billions of peopleand the environmentsuffer.

The challenge is two fold. First, creating institutions that generate incentives for conservation. (This will help avoid pathologies like those in the Ogallala.) Second, is to make sure the nearly three billion people living on less than two dollars a day have affordable access to water. Fixing the first is relatively easy. Here's how to begin.

How about pricing water and treating it like any other tradable commodity? This approach surely makes sense, especially in the U.S., where we already have robust and transparent commodity markets. Gasoline is just one example. At over $3 a gallon for gas we have all that we can afford to consume. Successful water markets exist in several states. Pricing water allows these markets to evolve to include a focus on environmental protection, e.g., assuring instream flows and creating "water banks."

In a market economy, prices transmit information about relative scarcity. Increasing the price of agricultural water gives agricultural growers an incentive to use water more efficiently. Only when water is priced will we treat it as dearly as other necessary commodities.

The second challenge, to make sure the world's poorest have access to water, is harder. Getting water to rural areas, far from urban infrastructure, is the greatest challenge. Here, small (i.e., individual wells), publicly funded projects seem to be

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