Inefficient Markets and their Effect on California’s Drought
Driving through California, the effects of the drought can be seen around nearly every curve. Rivers, lakes, and reservoirs with water levels so low that the water line of previous years is shockingly clearly seen. Yet, at the same time, the majority of people in California don’t really think about the drought on a day-to-day basis. Taking less time to shower, only watering the lawn twice a week are the few problems a common person faces as a result of the drought; it almost seems fictitious. When debating about reasons for the drought, one of the oft left out factors are inefficient markets. Water, while a basic need, is extremely cheap due to massive subsidies the government places on it. This means that the effects of supply and demand are little felt by an average person. Even businesses and agriculture are not strained as much as one would think by the drought; California still produces 80% of the world’s almond supply, yet a single almond can take up to a gallon of water to produce.
The very same problem can be seen with oil and gas; it’s cheap and driving a car that runs on gas is far cheaper than driving an electric. If gas were priced much higher, taking in environmental concerns, electric cars would be prolific across the country. These problems can occur when goods are not priced correctly. The cost of water and gas does not reflect its value. In a matching market, when every consumer values a product more than it costs, they will all buy that product. In a free market, this issue eventually addresses itself, as this demand will cause an inflation in the price; it will cause the cost to closer reflect the value of the product. In a controlled market, such as one that is subsidized by the government, such goods need to be priced accurately so that not every consumer goes buying so much water without a second thought. If the cost of water in California reflected the effects of the drought (supply being low), then perhaps almond makers and agriculture would have some of their business displaced and moved. With costs changing gradually enough over the years the drought has lasted, the impact may not end up too severe either.
Commonplace views around California
Article Link:
http://www.forbes.com/sites/tomgillis/2015/07/15/the-drought-and-what-its-teaching-california-and-tech-about-inefficient-markets/