[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.

[dahart]

Hehe, then you can’t possibly claim a mild price increase is mildly helpful.

[richk449]

Truly, you have a dizzying intellect.