Economics, Water Use, and the Environment

Lurking beneath our natural desire to ensure that water will always be avail­able to perform its many life-supporting functions is the fear that it will run out.  Our thinking (in truth, our feeling) about water tends to be dominated by myth and misunderstanding. We believe that our “need” for water is exponentially greater than other wants and needs; we also believe that this intense “need” confers special status, making water a unique resource. We mistrust the ability of people to recognize water’s special sta­tus, and we assert that only through common or public ownership can we preserve water for future generations. Paradoxically, while our conviction that water is unique derives from our knowledge of its many important uses, we have trouble acknowledging the value of water in anything other than pris­tine form. We tend to assume that, when it comes to water, there’s no such thing as “too clean.” Unfortunately, in acquiescing to these myths, we make things worse; we create for ourselves an intellectual box that constrains our ability to conserve the resource we value so highly.

These lessons challenge the myths and use economic reasoning to suggest a new way to think about our use of this vital resource. In brief, the lessons assert: (1) that in economic terms, water is not fundamentally different from any other resource, good, or service; and (2) that many of the answers to our concerns about water conservation and water quality can be found in markets, the same institution that provides us bread, shoes, underwear, tractors, flowers, computers, charities, flu shots, bubblegum,  the collectible craze of the moment, and the myriad other products we find “essential” to the way we wish to live.

Lesson Outline

Introduction

Lesson 1:  When Is A Basketball A Substitute for Water?

• Key Terms and Concepts: Choices; Incentives; Law of Demand
• Activity: How Much Water Do You Need?

Lesson 2:  Waste Is in the Eye of the Beholder

• Key Terms and Concepts: Choices; Supply; Incentives; Prices; Scarcity
• Activity: Diamonds & Water – A Question of Value

Lesson 3:  Yours, Mine, Ours:  The Rules of Ownership

• Key Terms and Concepts: Incentives; Property Rights; Property
• Activity: The Rules of Ownership

Lesson 4:  Water Law – The ‘Rules of the Game’ Matter

• Key Terms and Concepts: Incentives; Institutions; Property Rights; Voluntary Exchange
• Activity: The Impact of Water Law on People’s Choices; Fishermen and Farmers – Conflict and Water Law

Lesson 5:  The Tragedy of the Commons

• Key Terms and Concepts: Incentives; Property Rights; Tragedy of the Commons
• Activity: M&Ms and Lemonade

Lesson 6:  Would You Swim There?

• Key Terms and Concepts: Marginal Analysis
• Activity: Marginal Analysis – Would You Swim There?

Lesson 7:  The Future of Water – Crisis or Cooperation?

• Key Terms and Concepts: Scarcity; Choices; Opportunity Cost; Price & Other Incentives; Cooperation through markets; Property Rights; Institutions shape incentives 
• Activity: The Pearl River – Water In or Water Out?