A Quick Reminder
It's easy to become pessimistic about economics, especially when you only think about it on a very abstract level. An article in the New York Times about groundwater in India reminds me that economics has a very important and concrete purpose. In short, Indian farmers are pumping too much water from the aquifers, and essentially they are running out. The government has resorted to shipping water into dry regions by train, which is expensive and insufficient.
The article explains some of the policy decisions that have led to this state of affairs. The government subsidizes electricity, which is used to pump water in prodigious amounts. The government charges relatively little for the water that it sells. It's unclear that intensive agriculture was ever appropriate for some regions, like Rajasthan.
Economics tells us that people will over-exploit resources when they don't bear the full cost of that exploitation. Low prices for electricity and water are part of the problem. This is also a classic public goods problem, since water is nonexcludable (everyone pumps from a common pool). We should expect super-optimal exploitation in such circumstances.
Does economics provide a solution? Sort of. As the article points out, raising rates for electricity and water is probably infeasible politically. It's not clear that there's a less painful way to adjust than what's happening in the status quo (people are moving off the land to find jobs in other sectors). Still, it's the general sort of problem that economics can help us comprehend, and I'd like to think that good economic policy would have prevented some of the suffering going on now.
As a final note, this is also a case in which simplistic "free market" ideology wouldn't have produced a good result. Simply allowing people to do whatever they want with minimal government interference would have led to over-exploitation even in the absence of subsidized electricity. The solution is to apply actual economics, not simplistic libertarianism dressed up as theory.
The article explains some of the policy decisions that have led to this state of affairs. The government subsidizes electricity, which is used to pump water in prodigious amounts. The government charges relatively little for the water that it sells. It's unclear that intensive agriculture was ever appropriate for some regions, like Rajasthan.
Economics tells us that people will over-exploit resources when they don't bear the full cost of that exploitation. Low prices for electricity and water are part of the problem. This is also a classic public goods problem, since water is nonexcludable (everyone pumps from a common pool). We should expect super-optimal exploitation in such circumstances.
Does economics provide a solution? Sort of. As the article points out, raising rates for electricity and water is probably infeasible politically. It's not clear that there's a less painful way to adjust than what's happening in the status quo (people are moving off the land to find jobs in other sectors). Still, it's the general sort of problem that economics can help us comprehend, and I'd like to think that good economic policy would have prevented some of the suffering going on now.
As a final note, this is also a case in which simplistic "free market" ideology wouldn't have produced a good result. Simply allowing people to do whatever they want with minimal government interference would have led to over-exploitation even in the absence of subsidized electricity. The solution is to apply actual economics, not simplistic libertarianism dressed up as theory.
posted by James | 10:55 AM
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