UT-Austin economics professor Daniel Hamermesh argues that the water shortage problem in Austin, TX “could readily be solved by pricing the water sufficiently high to ensure that we get through the drought with water to spare” (see Grazing the Non-Commons).  I wholeheartedly agree with Professor Hamermesh, and I would like to follow up his comments on the Freakonomics blog with my own.

Since 2007, Austin has been subject to so-called Stage 1 Water Use Restrictions.  Under Stage 1, residents are legally entitled to use their automatic sprinkler systems before 10 a.m. and after 7 p.m. two days per week (the actual days of the week depend upon whether one has an even-numbered or odd-numbered residence).  Violations of this schedule are Class C misdemeanors, with each instance punishable by a fine of up to $500.  Starting August 24, Austin will be under Stage 2 Water Use Restrictions, which limits the use of automatic sprinkler systems to Saturdays (for odd-numbered residential addresses) and Sundays (for at even-numbered residential addresses) before 10 a.m.

The manner in which water use is priced (with a nonlinear pricing schedule that is increasing in the volume of water usage) motivates most consumers to conserve.  However, I suspect that the prospect of a $500 fine and Class C misdemeanor citation probably affects the timing of water use more than it affects volume for most consumers.  In spite of the (rather compelling) economic incentives to conserve which derive from nonlinear pricing, apparently the City of Austin still finds it necessary to impose these highly restrictive rationing constraints. As Professor Hamermesh noted in his blog posting, the Austin American Statesman went so far on Monday as to publicly shame the top 10 users in June and July 2009 in a front page article. This seems like a market failure to me, and my “inner economist” suggests that a better way to mitigate this externality (rather than impose such draconian water use restrictions) would be to make the pricing schedule sufficiently convex so that even members of the top 10 club would sit up and take notice!

I suspect that like Professor Hamermesh, most Austinites will abide by the timing restrictions on watering.  However, it is also very likely that many (if not most) Austinites will set their sprinklers to run longer each session now that watering can only occur once rather than twice per week.  The problem with the policy is that it primarily addresses timing incentives, and not the real problem, which is over-consumption.  It remains to be seen whether private actions (running sprinkler systems longer per “legal” session) don’t end up making matters even worse than they already are.