U.S. Urban Water Prices: Cheaper When Drier

Abstract

AbstractPublic water utilities are called upon to address multiple and often partially conflicting objectives, allocating potentially scarce water in an efficient and equitable manner while covering the costs of water supply. Economists typically advocate using prices to balance supply and demand of a scarce resource. But high prices necessary to balance supply and demand for scarce water may unduly burden poor households. We analyze the pricing policy of public water utilities in the major city of the 35 largest metropolitan areas in the United States. We would expect water prices to be higher in water‐stressed regions. However, we find the opposite pattern in the data: cities facing greater water scarcity tend to have lower water prices. Sacramento, Las Vegas, and Phoenix, have the lowest water prices. To address equity and ensure that all households have access to water, we would expect low prices on essential water use with higher prices for additional water beyond essential use. However, we find that the majority of cities have higher per unit water prices (average price) for low use than for high use. Such pricing may leave major urban areas in the United States ill‐prepared to meet future water shortages in an equitable manner.