Scarcity Rent and the Price of Water

If OPEC priced its oil based on how much it costs to get it out of the ground, we’d be swimming in it right now. Or, more precisely, we would have been swimming in it, until we used it all up. The peak would have come long ago.

When the market prices oil, the cost is based on the scarcity, which is higher than the cost of production. You use less. It last longer. Won’t last forever this way, but this approach to pricing stretches out the resource a bit.

Water? Not so much, as this discussion in the city of Santa Fe exemplifies:

The City Council late Wednesday narrowly approved an 8.2 percent boost in base rates for each of the next five years, allowing water managers to execute a 10-year plan to upgrade and maintain the community system.

The pricing discussion here is entirely about how to meet the costs of delivering the water. Which here in the West we are using up at an alarming rate.


  1. Long ago, I had a discussion with a government purchasing agent on this same topic. He wanted me to sell him an item at my cost plus a small profit.

    I asked him whether he had a hobby. He said that he made rugs for sale at Indian Market. I asked him his cost of manufacture. He said, ‘Four dollars.’

    I asked him what he sold his rugs for. He said, ‘Twenty dollars.’

    I asked why. He said, ‘That is the market price of these rugs.’

    I said, ‘Given that why should I sell you my item for cost plus a small mark up when I can sell it to someone else for market rates.’

    Because of the personal example, for him, of selling rugs at Indian Market, the government employee now understood my point and the conversation went well.

    Would a similar specific example work with the Santa Fe council?

  2. Good point, but you are missing an important aspect of market structure:

    Water is provided by a monopoly that can charge what it wants, so it can restrict supply to raise prices VERY high….

    OPEC has some market power, but its selling oil above cost because the marginal producer (e.g., Venezuela or Canada) cannot supply at less than $50 or $80/bbl. OPEC countries keep the difference as producer surplus…

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