California Water Pricing Essay Example | Topics and Well Written Essays - 750 words

California Water Pricing - Essay Example Under marginal cost pricing, subsidies are withdrawn and the cost of supply of water is raised to match its full marginal cost. This will cause the demand for water among the farmers and other selected sectors to reduce considerably. This, in turn, creates an excess supply of water that the district supplier can distribute. Multiple water users are likely to pay a higher price for the extra water than the marginal cost, reflecting scarcity conditions in a relatively supply-constrained water market. Thus there will be excess demand as the market price will be much higher than the marginal cost at which it is being priced. There is better efficiency in allocation as the supply is routed to users whose value of the resource matches the marginal costs incurred in its supply. The question of distribution of the excess supply of water is to be debated next. Marginal cost pricing plus auctioning excess demand: One method of distribution would be auctioning off the excess supply of water. In this scenario, farmers buy their existing allocation of water at the marginal cost and are allowed an option of buying extra water, which is beyond their original allocation, in a competitive bid. The excess water, in this case, will be redistributed to the highest bidder. Full water marketing: The other option available is full water marketing. In this case, water will be traded freely at the market and price will be determined by the forces of demand and supply. Water as a resource is scarce in its existing quantity and hence supply will remain inelastic. Therefore the price of water will be higher than the marginal cost, the demand will drop and this will lead to more excess water supply for redistribution than the previous scenario. Full marketing will thus yield greater efficiency gains than the options discussed above. The excess water can be redistributed either by auctioning rights or by granting rights by charging the users the marginal cost and allowing for resale of these rights in the open market.