How to solve the world water crisis

With my colleagues at the University of Canterbury's Water Markets Research Group, we've worked out a way to solve this horrible problem. I've put it on my academic web site: Why and how to set up a water market that is physically, economically, and environmentally correct.

This work depends on operations research, hydrology, economics, and basic information technology. Thus the title for my blog.

We've named this approach the Forever Fair Water Market System. I created a logo for this work that is meant to look both like an infinity symbol and two waves sharing water.

I commissioned my talented niece Florence Kerns to create this image that represents some of my interests: the impact of business on the hydrological cycle; the interactions of water, energy, and nutrition; the impact of cities on ecology.

Agriculture produces demands of energy, water, and soil, and supplies of energy and food. These demands and supplies interact in complex ways. Agriculture’s supply of food also affects transportation, inventory management, and nutrition. Consumers' choices of foods produces demands on the food supply chain. Consumers' choices of habitat and transportation also produces demands on agriculture and the environment. It's a complex world!

How can we sending price signals to get commerce to back off its environmental impact? My research is to find ways to gently press business away from its environmental impacts. Toward that end, here is our proposal to solve part of the world water crisis.

If you use this image, please reference me and Florence.

Ethics and water charging

Water pricing often makes people worry about poor people. A recent study on Punjabi farmers described the environmental problems associated with farmers' wasteful use of water. Charging the farmers just 25% of the price that city people had to pay would be enough to motivate the farmers to be much more careful. This would have only a modest effect on their incomes, but would have much better environmental outcomes.

Why the farmers should pay 75% less than the poor city people is beyond me.

This whole issue of "social acceptability" for water pricing makes no sense. Water should be priced like everything else - by supply and demand. It most certainly should not be free, just as oil, plastic, and herbicides shouldn't be free. Its use has too big of an effect on everyone else.

Thoughts on how to solve some of humanity's problems

I've noticed that economics and the drive for profit drives a lot of things. As a graduate of the University of Chicago, I have to admit that I don't mind that humanity is basically Ferengi, and resource allocation via markets is definitely the best form of resource allocation. But it seems that some of humanity's problems come from our insatiable demand for more.

Markets by their nature demand more all the time. They're going to push every boundary imaginable for greater profit. The solution is not to forego the market approach, but to discipline the market approach.

The problems that I think I know how to address are (1) lack of water, as I described in my first post, (2) lack of natural space where people generally stay out, in order to give the rest of nature a chance, and finally (3) obesity and its siblings poor nutrition and hunger.

Smart markets for water allocation

How can humanity solve its problems of the environment? It seems they will have to be solved one at a time. The problem of global warming, to me, seems pretty simple - just cap and trade. It's the politics that we have to get past, unfortunately.

For water, I have been working on a concept for water markets that draws on the work of Vernon Smith, the Nobel Prize winner. With his colleagues, he developed the concept of a "smart market", which is an auction that manages physical constraints through a linear program (LP). Users submit bids via internet; a market manager then enters these bids as the objective coefficients. The constraints manage relevant interactions and externalities. The market manager solves the LP, and reports the primal values as the auction outcome, with the dual values as the market prices. Such markets are now in active operation for electricity and natural gas in Australia as well all over the world. Similar markets are operating for goods and services ranging from radio frequency spectrum to contracts to cater Chilean school lunches.

The analogy of electricity to water is quite natural. Despite the huge amount of work research and implementation on electricity markets, surprisingly, no one has implemented this type of market for water. It may be due to the technical requirements, which are daunting, but electricity markets are hardly trivial. Vernon Smith and colleagues are operating games for a trivial surface water system, but nothing more. So we have developed a system from scratch for ground water, and this naturally extends to combinations of surface and ground water, runoff, salinity, flood control, impervious cover, and land clearing. The system is based on the well-studied science of hydrological optimisation, but rather than minimise cost, the value coefficients come from the buyers and sellers. The system can use the best available hydrological science, which would come directly from a hydrological simulation such as MODFLOW. The LP constraints correspond to required environmental flows; the constraints directly impose sustainability on the market, which seamlessly clarifies users' obligations to the environment. Quantities and prices correctly reflect all relevant impacts of abstraction, without tax or subsidy. The result would be much more reliable environmental flows. The use of a smart market eliminates the transaction cost associated with reallocating water. Reducing transaction costs produces increasing returns to scale, as users enjoy both the lower transaction cost and gains from the more frequent trades.

Humanity needs to rewrite her contract with Nature, with an agreement to live under the constraint of sustainability. Our work describes in detail how to write that contract for the gift of ground water. As of this date, I am actively looking for collaborators with skills in hydrology or operations research.