The next hot commodity...

There is growing unease in many places on our globe about water. And often the solution seems to be pricing it.

Water is often free or sold very cheaply by municipal utilities. If you have a pipe going into your house, you get water that way and it doesn’t cost much. But that often means that the utility doesn’t have enough revenue to get water to the truly poor. In places like Africa and India, where millions live in slums, there are no pipes, and people become dependent on trucks or bottled water much of the time. If everyone paid a bit more, then the poor could benefit from the surplus.

This idea strikes many as anti-humanitarian, but may represent the best hope of redistributing this scarce resource efficiently.

Historically, water has been underpriced. Most countries have treated it as a social rather than an economic commodity, subsidizing prices so that it is affordable for everyone, especially the poor. In fact, these subsidies do little to help the poor. In developing and transitional economies, 30 to 60 percent of the urban population has no formal hook-up to potable water. Often, water vendors with tanker trucks are the only option. A United Nations study found that the poor pay on average 10 to 20 times more per liter (and sometimes as much as 300 times more) for water purchased from water vendors. Consequently, many go without enough water. [More]

Above all, getting government out of the water business is the best first step.

HOW to provide sufficient clean water to the vast and arid north of China has long been a headache for its rulers. Of late they have considered some ambitious proposals. One of the most hotly debated, to divert water hundreds of kilometres from Tibet at a cost of tens of billions of dollars, was scorned this week by the water minister. What about a more modest (and less Maoist) approach: using market-driven prices to deter waste and pollution? [More]

As water becomes more scarce, the idea of a central water market may be less far-fetched. Certainly those with ample resources have pondered the benefits of selling water on an open market. And well-developed and amply funded markets are arising rapidly in areas of the US with exploding populations and limited natural resources, such as Nevada.

Interstate trades are the newest form of water marketing and are taking shape on the Colorado River where California and Nevada face water shortages and high costs for alternative supplies, while Arizona has cheap surplus water from the Central Arizona Project. A recent agreement between the states allows Arizona to market a portion of its Colorado River allotment to California and Nevada. Under the agreement, California and Nevada may store river water in Arizona's underground aquifers, banking it for the future. When either state needs water, it takes its share of the river plus some of Arizona's unused allotment. In return, Arizona pumps water from the aquifer with California and Nevada paying the pumping and storage cost plus a fixed rate for the water.

Nevada is expected to be the new bank's biggest customer because the state has experienced record growth in Las Vegas and holds a small share in the Colorado River. California, on the other hand, is showing little interest in the bank. For years, the state has benefitted from unused river allocations by upstream states. Currently, any water that is allocated to Arizona and Nevada, but unused by those states, runs downstream to California, which consumes nearly one million acre-feet per year of this unused water. With the bank in place, Arizona and Nevada can start charging California for that water or begin storing it.

We could see a new trading pit in Chicago, and a startling new lesson in personal economics as something we thought of as free becomes a budget expense.

But then when we started buying it for $1 per half-liter at a vending machine we should have seen what was coming...