The economics of footprints

AK emails:

What is the economically sound argument for reducing one’s water footprint (e.g. by eating less meat)? The common sense explanation goes something like this:

“There is a limited amount of freshwater that is available to humanity every year. People waste a lot of that on unimportant things. If people used water less wastefully, more water would be available for more important things. Hence, water scarcity would be reduced.”

That is, roughly, the common sense argument. But I am sure that this is the sort of question where common sense could easily be wrong, and a more accurate view of economics could provide a lot of clarity. So I was interested in your opinion. How would you describe it in economic terms?

Luckily for AK, I just wrote a draft paper on “pricing water scarcity” that deals with these topics. (I’ll be posting a draft here in a month or so, for you all to comment on.)

The key ideas here are water scarcity and waste/important, which can be mapped to supply and demand. In terms of supply, “water scarcity” means that there is too much quantity demanded at current prices for the available quantity of water. When I teach, I give students the example of 20 $0.50 beers for 20 people. At those prices, it’s probable that the 20 beers will be gone before people “lose their thirst.” At $5 per beer, that probability falls. At $20/beer, I am pretty sure that there will be beer left at the end of the night. Note that people are just as thirsty with higher prices, but unwilling to spend money that can be used elsewhere (opportunity cost) on overpriced beers. On cheap beers… they’re all in.

Also note that some people don’t like beer, at any price. In the beer example, they may not play a role, except in the long run, which allows for people to change their tastes (stopping or starting beer drinking). This discussion of preferences and tastes is not as relevant with water (we all need to drink and bathe), but it can get interesting when it comes to “marginal water uses,” which brings us to demand.

It’s pretty easy to rank our preferences (or “demands”) for different water uses, beginning with “important” (drinking water) and moving to less important (in terms of your priorities but also in your willingness to pay) uses. Watering the lawn or filling a swimming pool might be seen as “wasteful” to some people, but pretty much everyone can agree that they are less important, or that people — when faced with water prices — will demand less water for their lawns without reducing their demand for drinking or bathing water. 

We consume most of our water indirectly, via eating foods or using goods that require water to produce. A meat diet indirectly uses a huge amount of water because each animal needs to eat a lot of food (food that humans can eat) before they can be turned into meat. It’s this basic thermodynamics that explains why vegans have a much smaller “diet footprint” than meat-eaters. Overconsumption of clothes, electronics, vacation travel, you name it, also results in a heavy indirect footprint. Given that indirect water consumption is often a 100x multiple of direct consumption (a hamburger requires 660 gallons/2.500 liters vs a 5 minute shower, at 5 liters/minute) and that people around the world are getting richer, we have a lot to worry about here.

Scarce water can be rationed in a few ways. Price rationing (use as much as you want as long as you pay the price) is easy to understand. Per capita rationing (everyone gets x liters, no matter their wealth or willingness to pay) is considered fair by some people but it’s harder to manage (water taps must cut off when x is reached each day) and often results in an underground market (those who use less than x sell to those who use more). Perhaps the least efficient rationing method is bureaucratic (i.e., someone deciding that you can only use water in the evenings, cannot water your lawn, or must install a low flush toilet), but bureaucrats (for some reason) seem to like that method.

Thus, we have these facts:

  • When water supply is limited, it’s necessary to forego some demands
  • Everyone has their own ranking of demands, from most to least important 
  • The easiest way to limit consumption to “important” uses is to set a price that allows people to pay for high-value uses while encouraging them to forgo low-value uses.
  • Low prices that ignore scarcity encourage consumption of water now (on the lawn) that we might need tomorrow (for drinking).

Turning to AK’s opening (What is the economically sound argument for reducing one’s water footprint, e.g. by eating less meat?), here’s my one-handed advice: Set water prices to reflect water scarcity, and people will prioritize important (to them) over wasteful (to them) water uses. This advice, given the vast quantities of water embedded in food, will mean that people who eat less meat will save far more money than people who stop taking showers. 

So enjoy your shower, flush your toilet, kill your lawn and enjoy an Impossible Burger 😉

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

6 thoughts on “The economics of footprints”

  1. Haha, thank you for your answer 🙂

    Does this mean that in economic terms, there is a shortage of water, i.e. the market price is below the equilibrium price? What is the reason for the shortage?

    Suppose that a lot of people in the developed world reduce their water use. Am I right to think that this shifts the demand curve, and leaves the supply curve as it is, thus reducing the shortage?

    Could this process have any perverse effects?

    1. Q1: “Does this mean that in economic terms, there is a shortage of water, i.e. the market price is below the equilibrium price? What is the reason for the shortage?”

      A1: Yes, there’s excess scarcity (and perhaps shortage) when “market price” (actually bureaucratic price) is below equilibrium price (where S & D cross). The reason is that politicians set prices too low.

      Q2: “Suppose that a lot of people in the developed world reduce their water use. Am I right to think that this shifts the demand curve, and leaves the supply curve as it is, thus reducing the shortage? Could this process have any perverse effects?”

      A2: Yes, you’re right. That’s a change in preferences (perhaps due to concerns of drought turning to shortage) that’s unrelated to price or supply. The perverse effect is usually a steep drop in utility revenues bc many utilities have high variable charges (volumetric pricing) but high fixed costs, so a drop in quantity means that revenue drops faster than costs. More here:

      http://www.aguanomics.com/2011/09/time-to-dump-increasing-block-rates.html
      https://www.aguanomics.com/2014/07/pricing-tap-water-for-efficiency-and.html
      https://www.aguanomics.com/2015/04/how-to-price-water-for-conservation-in.html

  2. So would you say that the following argument is correct:

    1) Each year, there exists a scarcity of freshwater in the world. The quantity of water demanded is greater than the quantity of water supplied. This scarcity is further exacerbated by problematic policies that set the price of water too low.
    2) If people in developed countries waste less freshwater, the demand curve for water shifts, so that the scarcity of water is reduced.

    I have a few more questions here:

    – Can other environmental issues, like land use, be understood in a similar way? Can we say that there exists a scarcity of agricultural land, or would that be a confusion?

    – Are there good estimates for how much of a difference consumption changes in the developed world make in this regard? The closest I have come across is the following, from Vaclav Smil’s “Water News: Bad, Good and Virtual”:
    “Rational food production and healthier eating in America and Europe could thus eliminate the need for at least 250 cubic kilometers of virtual water every year. This would be more than twice as much as is saved annually by the international trade in food and feed, and it would suffice to produce 200 to 250 million tonnes of cereals that could be exported to water-deficient nations, nearly doubling the mass of grain that is now traded annually worldwide. Or, as already noted, people could lower their overall appropriation of water, leaving this volume alone to perform its natural functions.”
    But I don’t really have a good feeling for what that means, I don’t have a good feeling for the extent to which the problem of water scarcity would be alleviated by reduced meat consumption in the first world, for example.

    1. Land is *not* subject to the same issues, as it’s easy to “exclude” (private good) whereas water, which flows from place to place, is not.

      If people ate less meat, then the demand for water as an input to feedgrains would indeed fall. That doesn’t mean that the water would go to the environment or growing food for the poor, as the farmers (in the US midwest, for example) would probably use the water for other crops (corn for ethanol is one ongoing bad idea), since their goal is to MAKE MONEY from THEIR water… not to help the poor.

      If the goal is to use less water, then the policy must focus on that, i.e., limiting use of groundwater, etc.

      1. So am I understanding you right then, that in your opinion:

        -simply reducing one’s water footprint (e.g. by eating less meat) doesn’t actually address the problem of water scarcity. So simply encouraging people to change their consumption habits probably doesn’t reduce the problem.
        -a solution would involve setting a different (higher) price for water, which in turn would reduce how much water people waste. Higher prices would make people consume the “right” amount of water. So the solution is to set water prices to reflect water scarcity.

        1. Yes and yes.

          BUT do note that such a pricing solution only works “locally” for a known water supply. The trouble (usually) is water management in a watershed, which might involve utilities (that can use prices) but also self-supply farmers and others how might be able to deplete “collective” water, thus inflicting damage on the virtuous utility.

          Read http://www.kysq.org/lwws/ (free download) for more on this global perspective 🙂

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