California Water Supply Srinks & Demand High, Price Stays Low - Why?

One has to expect California to not see the forest for the trees. It's called 'supply and demand' - when the demand goes up along with supply, the price goes down, but when the supply goes down but the demand still goes up, the price should go up. Why does this not register in California?

Should California Raise Water Prices?
Source: Richard B. McKenzie and Kathryn Shelton, "The California Water Crisis: Policing vs. Pricing?" Library of Economics and Liberty, September 1, 2014.

September 3, 2014

California is in significant drought, with a water crisis that has caused acres of crops to die or go unplanted, as water reservoirs continue to be depleted. According to one NASA water scientist,
"If this drought continues, we're going to be in a terrible situation within the next 12-24 months."

The water crisis has caused municipalities to take action, sending "water police" out to monitor water usage and charging violators for excessive watering and other violations. Neighbors have begun to report one another to city authorities for using their sprinklers too often.

According to NCPA Senior Fellow Richard McKenzie and Kathryn Shelton of the America's Future Foundation, water usage in California is suffering from the "tragedy of the commons." In fact, water use in the state has increased by 1 percent this year, despite the worsening drought.
Why are Californians unwilling to curb their water use?

• The authors explain that the state has incredibly low water prices: it costs less than 0.7 cents per gallon in San Diego and Los Angeles.
• McKenzie himself writes that he pays just 0.2 cents per gallon for water in Irvine, California, meaning that he can purchase over 2,000 gallons of water for the same price as a single gallon of gas.

McKenzie and Shelton write that because water is so cheap, few Californians see it as a precious resource. They encourage raising the price of water in the state:

• According to economists, raising the price of water by 10 percent will lead to a drop in consumption of 2 percent to 4 percent.
• In order to reduce consumption in California by 20 percent, rates will have to rise by 50 percent.
• By raising the price, consumers will give greater thought to their water usage and find ways to be more efficient.

To prevent the price hike from hurting the poor, Shelton and McKenzie contend that a progressive pricing structure (in which the price of water rises as use increases) should kick in after a consumer has reached a minimal level of water usage.