What would Adam Smith do?

Spreck Rosekrans is an Economic Analyst at EDF.

We at the Environmental Defense Fund believe that sound economics is a cornerstone of good environmental policy. To be smart about how we manage any natural resource, it is important to “internalize the externalities”, i.e. make sure the costs of pollution and environmental degradation are fully included in decision-making.

Under such a system, the famous “invisible hand” of economist Adam Smith would encourage rational use of limited resources without excessive environmental destruction. Water management in California and the west is the result, however, of a “first in time, first in right” policy that has little to do with economic efficiency.

As a result of California history and our water rights priority system, the price of water in our cities is between 10 and 100 times that in many rural areas. This differential is huge, even after accounting for the additional cost of moving and treating the water for urban consumption, and provides disincentives to efficient use. We’ll provide some examples in future blog posts.

But today’s┬áLA Times, featuring a bipartisan editorial opinion crafted by Governor Schwarzenegger and Senator Feinstein that encourages the legislature to put a $9 Billion “water infrastructure investment” bond on the November ballot, reminds us of our old battle cry “policy before plumbing” (are we wonks or what?). Does it really make sense to make a massive investment in infrastructure without making sure we are using our existing facilities as well as we could? Especially with a record deficit in the State budget?

As the legislature considers solutions for water management and restoration of our beleaguered fisheries, we urge them to bear in mind that it is critically important that we all have the incentive to manage water supplies prudently. Let’s ask ourselves – “What would Adam Smith do?”