An article in the New York Times about Spain’s water crisis struck me as another example of the importance of incentives, the problems of bureaucracies, and the superiority of market-based solutions to even the biggest problems.

Basically, we see two sets of responses to the problem of water scarcity in the southern parts of Spain.  On the one hand, a bureaucracy that tried to allocate water to different groups at different prices was created.  Shockingly enough, this response has major problems. People manipulated the system, as resort owners and vacationers planted a few trees and claimed to be farmers to get lower prices.  Meanwhile, farmers who had to pay very little for water began raising crops that needed more water. A trend that is a major cause of the desertification we’re now dealing with. While on the other hand, when costs and the decreasing availability of water actually had an effect, farmers moved towards more efficient irrigation methods and crops that required less water.

Incentives matter. Governments shouldn’t be subsidizing unsustainable lifestyles in arid locations, especially when that will only worsen the situation. If farming is only economically sustainable with subsidized water, people should not be farming there. Water should be more expensive where it’s scarce or hard to access, even if that means fewer farmers or a shift in population towards more fertile areas.  As water gets scarcer, a more market-based system would surely also do more to encourage the development of private desalination plants and water-saving technology, as opposed to simply pouring billions of taxpayer dollars into such projects.

If farming isn’t working out, Spain should move towards less water-intensive industries in those areas and import crops from places with more adequate resources and a comparative advantage. Very high water prices would encourage even the resorts and golf courses to find ways to reduce water usage rather than search for bureaucratic loopholes. People find ways around bureaucracies, but it’s much harder to find a way around the market.