The Science & Politics Behind the Game - The Economics of Water
This is the 2nd in a series of in-depth explorations of the real life issues behind the game.
Water - not your average product:
Water is essential to life, yet it is one of the cheapest commodities - even in Los Angeles, a penny buys 2 gallons of tap water.
The economics of agricultural water
For a farmer, land with no water at all will not grow anything, but doubling the amount of water applied to a piece of land does not double the value of the crop produced. In California, irrigation water used to be a penny for 30-60 gallons, now the drought has caused the price for irrigation water to surge to a penny for 3 gallons ($1,000 per acre foot) or more. As a result, some farmers with access to water rights, especially those that plant annual crops, have opted to sell their water and not grow anything at all.
For farmers who have invested in perennial crops, such as nut and fruit trees, the math is different. These trees take several years from planting to crop production, and take even longer to reach maximum yield. If a tree dies due to drought, the farmer has to start over. As a result, these farmers are willing to pay today's high prices for water.
The compounding effect of drought
While the rice farmers who sold their water rights to cities and almond farmers might actually come out with a bigger profit, the sudden decline in farming has compounding effects on their local community.
As farming in California is an export industry that sells to other states and nations, it's a major source of money entering the economy. When farming prospers, money enters the community and can recirculate several times as farmers hire workers, and those workers then shop at local businesses. The people working at those businesses then shop at other businesses, and the multiplier cycle goes on.
When the spigot shuts off, the loss to economy is also multiplied. Farmworkers lose jobs, businesses that sell farm equipment and supplies suffer, and the government loses sales and income tax revenue - right when unemployment and high food prices increases the need for government assistance.
The economics of urban water
Historically and currently, the bulk of the cost of urban water is in the infrastructure to deliver it. As a result, many cities charged flat rates and didn't even bother to meter. For example, in Sacramento, the installation of water meters only started in 2005 and many houses still pay a flat rate. Now, many cities charge conservation rates, where each household is given a certain amount of water at a low rate, with any overage charged at about 50% more.
This makes conservation a mixed bag for water utilities. Conservation is generally good and reduces the need to buy expensive water from farmers or invest in desalination and water recycling. However, the reduction in water bills often ends up costing the utility even more than it would if they were to just buy more water. Of course, if no one conserved, everyone would lose as the price for water would go up even more. Electricity and garbage utilities face similar issues.
As a result, cities such as San Francisco have moved to a monthly service charge + per-gallon charge rate structure. The average Californian urban household pays $40-100 a month for water. Low income discounts are often available. In places where rent can exceed $2000, water is a relatively small expense, and the majority goes towards landscaping. Even a doubling in prices would not cause the urban economy to collapse.
Economics in the game
In California Water Crisis, the farms are assumed to be perennial crops such as wine grapes or almonds, as the high value, labor intensive crops with the most economic impact fall in this category. Unwatered farms are lost and new farms don't return a profit until the 3rd turn.
Northern California, which represents a classic leftist coalition of liberal elites and disadvantaged groups, takes an approval hit whenever farms close anywhere in the state. This reflects the disproportionate impact of rising food prices on people with low income (food often makes up the largest monthly expense) as well as how a loss of farm jobs often causes people to move to cities, increasing urban unemployment as well.
Southern California represents the urban middle and working classes, for whom housing shortages are a bigger concern than water shortages. As a result, their approval rating drops if no new housing is built.
The Central Valley represents the rural economy, reliant on agriculture and the industries and towns it supports. At the start of the game the CV has the most water, but since the cash produced by farms is less than that of cities, it faces an urgent need to create an urban economy to sustain itself after the price of water gets too high for agriculture to be profitable.