Will free markets clean up California’s dirty water? – Pacific Research Institute

Will free markets clean up California’s dirty water?

The New York Times has discovered that many of California’s public water systems are fonts of deep trouble. This might be news outside the state, but residents have been aware of the problems for some time. So have officials — whose responses are never adequate.

According to the Times, “as many as 1,000 community water systems in California may be at high risk of failing to deliver potable water,” about one in three.

Recent data indicate that water for roughly one million Californians is spiked with arsenic, lead and uranium. Sometimes the water looks like it came directly from a swamp. Though it often can be safe to drink, who would put a glass of it to their lips when stores nearby stock shelves of clear water in sanitary plastic bottles provided by the “miracle” of free markets?

Adding to the problem is the fact that the struggling water systems are coping with crumbling infrastructure while bankruptcy is a real threat to some. Incompetence and corruption have contributed to breakdowns. The Sativa Los Angeles County Water District, one of the failing systems, “had no water meters … no computer systems, there were some extreme nepotism issues, and they were giving illegal holiday bonuses,” an executive with the Los Angeles Local Agency Formation Commission, which reviews municipal services across the county, told the Times. The commission learned in 2012 the often-cited Sativa district had not even conducted a financial audit in the previous seven years.

There’s no law of nature nor of economics that says water must be delivered by a government agency. Yet in California, nearly every drop of flowing water is under the boot of a public authority — local boards, state authorities and federal regulators.

The result has not only been hundreds of millions of gallons of substandard water, but chronic shortages that officials respond to by placing restrictions on use rather than allowing free enterprise to increase supply.

Government officials like government, so they try to solve all problems through that narrow lens. Recently, Gov. Gavin Newsom signed a bill that will spend $1 billion, at a rate of about $130 million a year, to provide clean water for one million Californians who can’t rely on the liquid comes out when they open their spigots.

Newsom initially wanted a new tax to fund the program. Instead, the dollars will be diverted from the state’s cap-and-trade fund. Taxpayers, already overwhelmed with one of the heaviest tax burdens in the country, were spared. It’s unlikely that in tax-happy California they will be so fortunate the next time.

California’s water woes — both chronic shortages caused by artificial, government-created droughts and poor quality — can be permanently resolved only by a private market that allows sellers and buyers to conduct their business the same way grocers and their customers engage in transactions. In a market environment, consumers wouldn’t have to endure lengthy spells of substandard water and maddening shortages. Businesses have a strong incentive to please their patrons. When they are free to seek profits, they innovate, invest, and adapt to earn and retain the customers that keep them in business.

But “regulators distrust a market system that weakens their regulatory discretion and limits their ability to respond to the demands of organized lobby groups, who seek control over water without paying for it,” says Hoover Institution scholar Gary D. Libecap.

While buying water is far different than ordering from Amazon because the delivery systems are so utterly dissimilar, markets find a way to connect consumers and providers. Libecap pointed out last year at the end of California’s most recent drought there was a market waiting to happen as “willing sellers and buyers” were ready to trade through “the state’s massive network of canals.”

Of course there are arguments that water delivery is too important to leave to markets because markets fail, or that markets can’t overcome the mythical natural monopoly inherent in water delivery.

But markets don’t fail. Businesses fail. And when they do, markets not handcuffed by political interference fill the void. Markets also bridge the gaps created by inept public policy and destroy monopolies that aren’t protected from competition by government.

As complex as California water laws are, unbundling the system from its current arrangement would be less difficult than many might imagine. Australian water laws were once similar to California’s labyrinthine legal framework, yet “it is now hard to imagine what Australia would do without” water markets, say the authors of a 2018 university study.

That could be California in 30 years. Better than the alternative, in which Californians are fighting each other for water the way Venezuelans brawl over food scraps.

Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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