Water and Diamonds

Two hundred years ago Adam Smith compared diamonds to water, questioning the value of one compared to the other.   Diamonds—sparkly, beautiful, and rather useless—commanded such a high price compared to water—the foundation upon which all life was built.  Not much has changed.   Water is no less precious and yet we still pay pennies for it.  We know water is valuable, yet its value of use (utility) is not reflected in its value of exchange (price).  The price of water does not reflect its profound value, nor its opportunity costs, infrastructure, or externalities.  This is a product of history and also water’s role as a social good.

We don’t pay true costs of water because in many ways, we never have.  When water rights systems built on prior appropriation were established, there was enough water to meet the needs of the few people who lived here.  The long-held rights established at this time were at  little or no cost.  The West did face some strain as it began to develop, but a slew of irrigation projects tided the area over until the Age of Dams which enabled an era of thoughtless growth.  The American West owes a great deal to the Great Depression.  Without it dams like Hoover and Grand Coulee, products of Roosevelt’s New Deal, would have never been built.  These dams, huge displays of human power, ability, and desperation provided enormous amounts of water (and energy) for the West’s growing metropolises and farmlands.  We distributed water throughout the west, downhill and uphill, at low prices subsidized by energy generation and the American public. 

These huge public works projects were also enabled by the low wages of the Great Depression.  America had a huge amount of manpower willing to work for pennies, and we mobilized that workforce, building billions of dollars of infrastructure which we could never afford today.  (We also had two overzealous rival organizations, the Bureau of Reclamation and Corps of Engineers which pushed through even the most ridiculous of projects.)  This infrastructure is creating some problems for us today; namely, we can’t afford to repair that infrastructure, which is now falling apart.  In fact, 11 years ago, the Congressional Budget Office estimated water and wastewater infrastructure expenditures would cost $800 billion over the next 20 years.

While there are millions of people all over the world who have little or no access to clean water, here in the United States we can take our faucets for granted.  (This will cost us too—about $8 billion a year for the next 30 years just to maintain US drinking water infrastructure.)  Water is a social right which all people have a right to, and this aspect also limits our ability to balance price and cost.  As prices of water increase in the West, access to water will decrease for people who cannot afford the higher costs.  This relationship, along with general resistance to higher utility bills, makes it difficult to create change and removes market incentives to conserve and use water efficiently.

            Our water is underpriced, and in the long-term, this will cost us dearly.  Our infrastructure is crumbling, our water use is largely inefficient, and our environment is plagued by drought.  Our reluctance to pay is a product of history and access, but it is time to change this liquid paradigm.  Water is more precious than diamonds.  It doesn’t have to cost as much as diamonds, but we should at least pay for the costs we incur by turning on our taps and watering our lawns. 

To read more- look to The Business of Water: A Concise Overview of Challenges and Opportunities in the Water Market, by Steve Maxwell.