[richk449]

If the externality currently has no cost, then even pricing it low by orders of magnitude should be better than the status quo. Pricing it high by orders of magnitude would have negative consequences, but that seems unlikely to happen in practice.

[dahart]

> even pricing it low by orders of magnitude should be better than the status quo.

No, while this assumption seems econ 101 logical for a second, it’s not really true and the paper I linked above explains why. The pricing has to match the approximate order-of-magnitude cost of externalities for it to actually prevent any of the consequences we’re discussing here (or more likely be regulated so that Saudi Arabia can’t buy all the water regardless of price). There’s enough price flexibility over water and high enough demand that increasing prices 2x or even 10x today will not slow consumption at all. Water in the US west is already over-subscribed, and people with more money have already lined up to buy whatever becomes available. Increasing prices a little will only change who buys water, not whether it gets used. It has to be high enough that people start choosing not to buy it, which with water is an extremely high bar. In the mean time, draining our aquifers has ramifications for the next several thousand years.

This is the whole problem with cost-benefit analysis and free market thinking. When it comes to things that all humans need, like air and water, we have never yet managed to calculate either the true costs or the true benefits correctly, and reducing the equation to money loses all sense of proportion, and more or less always frames things in terms that let rich people and corporations win and take whatever they want.

[richk449]

I don’t think it is as black and white as you make it out to be.

Yes, there will be large demand for water even at higher prices. But less than at lower prices. Maybe a little less, maybe a lot less, but either way we are better off than now.

Also, there are many other effects to consider besides how much the demand will change. As the price increases, alternative water sources become more economic - trucking water in, building pipelines and canals, building water capture systems, desalinization, etc. Rather than solving the problem by using less water it may be possible to solve the problem by using water that has less environmental impact.

Generally speaking, I find your framework hard to parse. Free market thinking and cost benefit analysis are orthogonal, not two parts of a whole. Pricing externalities, as we are discussing here is not the same thing as cost benefit analysis.

Cost benefit analysis is a bureaucrat sitting in an office and deciding what policies should be enacted. Pricing an externality means assigning a cost to use of some scarce resource, and letting the market decide if and when the resource is worth the cost.

[dahart]

> But less than at lower prices.

That’s just assumption, and history has sometimes proven this assumption wrong. Higher prices do not automatically yield lower demand. It may take a threshold price increase before consumption changes at all, especially for scarce resources.

It’s true that alternatives change the equation, that I agree with. But the problem with allowing the market to sort it out is that Saudi Arabia might always be able to afford more than small town, Arizona. If you raise prices, you might only price out the locals and surrender your water to foreign interests. Charging money is in no way certain to fix this problem, it might make everything even worse.

> Pricing an externality means assigning a cost to use of some scarce resource, and letting the market decide if and when the resource is worth the cost.

What you just described is cost benefit analysis followed by free market thinking, definitionally speaking.

[richk449]

Here’s a definition of cost benefit analysis:

A cost-benefit analysis is the process of comparing the projected or estimated costs and benefits (or opportunities) associated with a project decision to determine whether it makes sense from a business perspective.

Generally speaking, cost-benefit analysis involves tallying up all costs of a project or decision and subtracting that amount from the total projected benefits of the project or decision. (Sometimes, this value is represented as a ratio.)

That is simply not the same as applying a tax or surcharge to something to internalize an externality.

[dahart]

I agree with that; you’re just not thinking all the way through what it means to do what you suggested, assign a cost to a scarce environmental resource in order to avoid the kind of negative future consequences we’re discussing here. In this context, the premise behind assigning such a cost requires a cost benefit analysis.

[richk449]

No, assigning a cost requires evaluating the cost. It doesn’t require evaluation of the benefits.