The Science and Economics of Water Shortage--Posner
The shorter the supply of a natural resource, the more important it is to have an institutional structure for allocating it efficiently among demanders, both present and future. In this respect usable fresh water is not fundamentally different from other scarce resources, such as oil and gas. The qualification in "usable" is important. Global warming does not diminish the world's supply of fresh water, but it reduces the supply of usable fresh water. Spring snowmelt is an important source of fresh water in many parts of the world, including California. That source will diminish as rising global temperatures cause more precipitation to take the form of rain rather than snow--and rain is much harder to collect and distribute than the spring runoff from melting snow. Higher global temperatures also increase the demand for water, as does an increasing, and increasingly prosperous, global population.
Of course, in principle, an increase in the demand for a good relative to its supply is not a problem. Price quickly rises, reducing demand and thus reestablishing equilibrium; so no more shortage. In the slightly longer run, moreover, the higher price leads to increased supply; in the case of water, one can anticipate greater use of desalination, that is, converting sea water into fresh water. Between water conservation by consumers trying to reduce their water bill, and increased supply of fresh water by the water industry, there should be no shortage, in the sense of an imbalance between demand and supply resulting in queuing, black markets, degraded quality, technological stagnation, politicking (Becker mentions discrimination in water pricing in favor of households and farmers), and corruption.
The problem is that the market in fresh water is inefficient. Becker focuses on the inefficient pricing of publicly owned water supplies--for example, charging a flat rate regardless of the quantity consumed, or failing to take account of reutilization (that is, the consumption of return flow). But a deeper problem is the institutional structure. One aspect is public ownership of water systems. There is no reason why a city should own the water company any more than it should own the cable television company. It is true that these are both networked services and therefore have aspects of natural monopoly; it would be wasteful to have multiple grids of water pipes in the same city. But through the contractual process a city can exploit "competition for the market"--that is, it can award a contract for the sale of water to whatever provider offers the best deal for the city's residents.
A still deeper institutional problem is the inefficient system (or systems) of property rights in water. In the western United States, where water is scarce, users obtain a property right by "appropriation," that is, by actually using water from a lake or stream. The amount they take is recorded and that is their property right. Any return flow can be appropriated by a downstream user. Now suppose an upstream user wants to sell his appropriation. He cannot do so without getting the consent of any downstream user who may be adversely affected by the sale because he had appropriated a portion of the upstream user's return flow. There may be many of those users, thus greatly increasing the transaction costs of reallocating water to a higher-valued use. In addition, because ownership of water rights is based on use, there is no incentive to hold water off the market, for future use; if one doesn't use the water one has appropriated, one loses one's property right.
The basic problem is that the same resource is jointly rather than singly owned, so that before it can be sold there must be a transaction among the owners, and the more owners, the higher that initial transaction cost. The problem is greatly exacerbated when an interbasin transfer is being contemplated, that is, a transfer of water from one watershed to another. For then all the users of return flow in the originating watershed will be deprived of their water.
Such problems are not unique to water, and are not insoluble. A parallel problem in oil is solved by unitization. Very often a number of separate oil companies will be drilling into the same underground oil field, and each has an incentive to take as much as it can as fast as it can (for example by drilling more wells), for what it leaves in the ground will be taken by other companies. The oil-producing U.S. states authorize "compulsory unitization," whereby if two-thirds of the owners of the land above a common oil field vote to conduct their operations under common management, the rest are bound. (Requiring unanimity would created serious hold-out problems.) A similar regime might be feasible for the users of a lake or stream. This would eliminate the inefficiency of a possession- or use-based system of property along with the inefficiencies associated with joint ownership.
In short, the solution to water shortages is likely to be privatization and intelligently designed property rights, using the institutional framework of natural resources such as oil, gas, coal, and other mineral resources as a model. This solution seems, moreover, as apt to African nations facing acute water shortages as it is to the milder problems of U.S. water supply.