On his New York Times blog titled "Economix," David Leonhardt posted (May 3, 2011) an interview with Charles Fishman about how we have treated water allocation in the past and, more importantly, the implications of those policies on usage patterns today and going forward.
The interview is quite revealing. Currently, the average U.S. homeowner pays a monthly water bill of $34 and uses about 300 gallons of fresh water per day. That amounts to a price of about $.004 (4 tenths of a cent) per gallon. As the column indicates, that is "free" water when compared to the $7.70 per gallon you pay when you buy a bottle of water at the Kwik-E-Mart.
Economic theory tells us that when something is under-priced, it will be inefficiently over-used. To quote from the Leonhardt column:
"Free water — water so cheap you never think about cost when making water use decisions — is a silent disaster. When something is free, the message is: It’s unlimited.Free water leads to constant waste and misallocation. Farmers and factory managers, hotels and gardeners never consider how much water they are using, and whether they are using it smartly — because the water bill itself sends no signal to be careful. (Half the water used by farmers worldwide is wasted.) There’s no incentive for efficiency."