Living in the Pacific Northwest, it can be difficult to envision a severe drought because of the regular precipitation that the region receives. However, just two states away, Californians are facing water shortages, higher prices for water, and alterations to water reliant markets and businesses. Not surprisingly, the progressive and liberal minded Californians have taken the problem into their own hands. For example, people are recycling used kitchen and bath water for their gardens. Not everyone is active in fighting the drought, but the percentage of Californians that are conscious of the water crisis is steadily increasing. The following quote shows the increase in water recycling, and that some Californians have been recycling water for many decades. “Californians have been reusing water for more than 100 years. In 1910, recycled water was used for agriculture at nearly three dozen sites, and by the 1950s, more than 100 California communities were using recycled water for agricultural and landscape irrigation (SWRCB and DWR 2012)” (Cooley, 1). Recycling water for commercial sites has helped slow usage, but if the California drought continues, people will have to significantly decrease the amount of water they use on a day to day basis.
In January, 2014, Governor Jerry Brown declared that California was in a State of Emergency as a response to the subsequent dry seasons. For the past three years the entire state has seen decreases in rain and snowfall. Specifically, Trinity County, the Lake Tahoe area, and the Southern Sierras have experienced dramatically warmer weather and very limited snowfall. This decrease in precipitation has caused a statewide fall in hydroelectric power production because the rivers flowing from the mountains are much lower than in previous years. The second negative side effect of the reduced snowfall is that the snow melt runoff usually supplies about 33% of the freshwater for California residents. The California government provides data on the water level of important lakes and reservoirs, which shows that in 2014, the mountain lakes responsible for freshwater were between 62%-71% of the usual capacity. (energy.ca.gov) These numbers illustrate the severity of the drought, and the next step is to analyze the effect of the California drought on economic conditions.
The California drought has severely affected hydroelectric power production and fresh water supply, which in turn has affected many other markets in California and elsewhere. For example, farmers in California have been hit hard by the drought because of the integral role water plays in the industry. A farmer who produces fruits and vegetables needs clean, fresh water to yield the best product, and if the prices of water increase or the quality decreases, the farmer will be negatively affected. From an economic perspective, fresh water for irrigation is an input cost, and with more expensive prices or lower quality the farmer will have to either purchase less water and produce less crops or irrigate with lower quality water and produce lower quality crops. In either case the value of the crops decreases because their is either less quantity or lower quality.
Holding all other factors constant, if the supply of fruit and vegetables decreases we would expect the demand per unit to increase and the prices to rise as well. We might expect the farmers to charge higher prices at the markets and make back some of the losses from the lack of production, but the price inflation at the markets is much less than the price inflation seen by the farmers. The following quote illustrates this point. “However, even for fresh produce, retail inflation is considerably smaller than the inflation seen at the farm level for the same fruits and vegetables. Commodity price swings have a muted effect at the retail level as many other factors make up the price consumers pay at the supermarket. Retail prices are also affected by fuel prices, labor wages, agribusiness contracting, imports, and other factors of production” (US Department of Agriculture). In the end, the farmer faces losses even with the increase in price of his products. Also, the increase in retail prices for produce as a result of drought does not occur immediately because it takes some time for poor weather and soil conditions to affect the farmers production.
We have seen how the drought affects the agricultural industry in California, but there are many other markets affected as well. Country clubs, ski resorts and any other business that relies on water or snow supply will experience economic hardship during a drought. In addition to markets and businesses, the general population is negatively affected by the decrease in hydroelectric power production and water supply as well. With fewer sources of electricity and fresh water, the prices of these household necessities rise, which changes the financial situation for many families in the state.
Cooley, Heather. “Water Reuse Potential in California.” Pacific Institute, 1 June 2014. Web. 3 Mar. 2015.
“How the Drought Affects California’s Energy, Economy and Emissions Goals.” – California Energy Commission. Web. 3 Mar. 2015. <http://www.energy.ca.gov/drought/>.
Kuhns, Annemarie. “USDA ERS – California Drought 2014: Farm and Food Impacts.”California Drought: Food Prices and Consumers. USDA Economic Research Service, 7 Oct. 2014. Web. 10 Mar. 2015.