Some parts of the country got a little needed relief from the drought this week, though more is certainly needed.  The drought's severity is manifesting itself in several ways, including some serious wild fires.  Fears of falling reservoir levels have led to programs in some parts of the country to actively push for water conservation.  Water consumption, unlike rain, is something that can be influenced by policy.  A more economical solution to the country's water problems, aside from a rain dance, or even conservation drives, might be to allow the price for water to fluctuate based on market factors.  Regulation in many parts of the country control water prices and thus the normal disincentive to consumption, higher prices, is not available to act as a force for conservation during drought times.  This is both unfortunate and dangerous.

     A recent study from the Cato Institute, a free-market think tank, suggested that further damage was created by laws prohibiting the sale of water between farms and cities.  As it stands, our current drought is indeed takings its toll on the nation's farmlands. A simple lack of rain is causing crop damage, a blight which is manifesting itself in increased food prices.  A news release by the Economist magazine earlier this week suggested that grain prices have hit 30 year highs and that their food index (what economists might call the price for the basket of a consumer's typical food purchases) has risen some 11% since June.

     To an outside observer, it certainly seems like the introduction of competition into water provision is unfeasible; indeed, I'm no expert in utilities.  Nonetheless, as an economist, I know that there are other forms of market deregulation which might help the country should it experience future droughts.  The most obvious is to allow water prices to fluctuate, as I mentioned above.  That is, set them based on market forces of supply and demand rather than by a regulatory committee.  Opponents fear that this may be an added financial burden to some groups, which is true.  But is this a risk worth taking?  If prices do not fluctuate, what we have during times of drought is a subsidized water source.  This means that someone still bears the financial costs, they are merely being transferred from one part of the economy to another.  At the same time, the fixed prices block any form of market driven conservation. This situation leads to an inefficient allocation of resources.  California's energy crisis should have taught us one strong lesson.  Imposing fixed prices for the provision of water is dangerous, both to firms and to consumers.  Perhaps the time for regulation in the nation's water utilities is drying up.