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Blame It on the Rain

Mises Daily: Thursday, February 14, 2002 by

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New York City is in trouble. Rainfall has been far below its historical level, raising the specter of water shortages. Fortunately, the government has a plan. A three-phase Drought Management Plan, to be specific. According to the City of New York's Department of Environmental Protection:

As conditions dictate the declaration of the successive phases of the City's drought response plan, certain actions are to be implemented. For a Drought Watch, the DEP responses are primarily operational, while activities that involve the consumer community are primarily informative and voluntary. For a Drought Warning, voluntary use restrictions are heightened and other City agencies are required to modify their operations. When a Drought Emergency is declared, rules and sanctions for failure to comply with them are imposed.

The ultimate reliance on coercion is the essence of all government "solutions." When the government identifies a problem--in this case, people wishing to use more water than is available--it simply declares the relevant behavior illegal, and levies fines and prison sentences to achieve obedience.

In the market, in contrast, scarce resources are allocated to their most important uses by the voluntary rationing of the unhampered price system. In the market, no threats or fines are needed to temper the appetites of consumers. Everyone can consume as much as they want, so long as they are willing to pay for it. Items that are in short supply have their prices driven up, which in turn reduces the quantities people are willing to purchase.

The standard response to such observations is that the "necessities" of life--electricity, natural gas, and above all, drinking water--are far too important to leave to the vagaries of market provision. Surely people must be placed above profits!

This argument simply assumes that government employees can provide services more reliably than profit-hungry entrepreneurs. But everybody knows that there is no contest between government operations and private business. During the hot summer months, when public utilities impose rolling blackouts and mandatory water restrictions, we never find Budweiser restricting beer sales to even-numbered days, or Oscar Mayer banning hot dog usage at cookouts. Consumers take it for granted that the products they desire will always be available to them.[1]

This doesn't mean the market is perfect; no human institution is. During the Fourth of July rush, for example, a particular store may run out of paper plates. But certainly an entire city will never have this happen. In contrast to monopolized public utilities, there is a diffusion of responsibility on the market, where each good has multiple vendors. Even if some make mistakes and forecast poorly, other entrepreneurs--eager to lure away customers--are there to fill the gap. It is absolutely absurd that the most important goods and services are the ones reserved for shoddy government provision.

Cynics may attribute the water shortages and draconian regulations to the lust for power that characterizes the would-be tyrants and busybodies who staff government agencies. Although this is undoubtedly true in many cases, the problem with public utilities is more fundamental. Even if government employees were the selfless servants they claim to be, without competition and market prices, they would still be incapable of rationally managing the water supply.

Ludwig von Mises demonstrated that under socialism, a system where the "means of production" are owned collectively (i.e., by the government), rational economic calculation is simply impossible. Even though they might possess detailed statistics concerning resource supplies, technological formulas, and consumer desires, the central planners would nonetheless be unable to select the most efficient uses for a given resource. Their decision to produce more of one good rather than another would be completely arbitrary.

We see this in the present drought situation. The city government's plan takes into account the capacity of reservoirs, the normal usage of residents and businesses, and the latest weather forecasts. But the components of this plan are largely arbitrary. Under the "Drought Emergency Rules," citizens can't wash their vehicles with a hose, but they may water their lawns from 7-9 a.m. and 7-9 p.m., but again only if it is an odd-numbered day and their house number is odd (and likewise for even numbers). Plant nurseries may continue to use water, but only at 95 percent of their previous levels. Restaurants must stop serving water, unless specifically requested by patrons. All showerheads must have a maximum performance of three gallons per minute at 60 psi. Finally, a "SAVE WATER" sign--the dimensions and appearance of which are also specified in the plan--must be placed in all dwellings holding over four families.

It is clear that this batch of one-size-fits-all regulations is completely inattentive to the differences among individuals, whose unique circumstances and tastes require different levels of water consumption. During a drought, the bureaucratic rules will lead some (especially those who flout the law) to consume water that is more urgently needed by others. But without the market test of profit and loss, the government will be unable to identify these people. It is obviously economically inefficient (not to mention tragic) if one person waters his lawn while somebody else dies of thirst. But it may also be wasteful in the same sense if golf courses become brown while car washes remain open. When making these sorts of choices, government officials have no feedback and thus operate in the dark.

Under the market system, each individual determines how much he or she consumes. Those who enjoy long showers may take them, so long as they are willing to pay the extra cost. The market price signals how valuable a marginal unit of a good is to "the community," since at any time the market price is exactly how much others are paying for the good. In times of drought, the price of water (if provided on the market) would rise to discourage frivolous use and to encourage imports from neighboring regions. There would be no "water shortages" on the free market, just as we never have beer or hot dog shortages.

The City of New York monopolizes the distribution of water, and as such the supply is always in jeopardy.  Rather than study the details of the Drought Management Plan, New York residents would be wiser to pray for rain.


Robert P. Murphy, a Rowley Fellow of the Mises Institute, is an economics graduate student at New York University. See his Mises.org Articles Archive and send him MAIL.


[1] This difference has nothing to do with the finite water supply.  After all, the supply of diamonds is finite, too, yet we never hear of a diamond shortage.  The ultimate proof of the government's culpability is the fact that consumers can always turn to (market-provided) bottled water in an emergency.