Apparently we are supposed to be worried about fracking depleting water in California. ThinkProgress reports that Despite Historic Drought, California Used 70 Million Gallons Of Water For Fracking Last Year. Similar concerns are raised by RT, Huffington Post, and even The New York Times. But 70 million gallons equals 214 acre-feet. Remember, alfalfa production uses 5.3 million acre feet. In our family-of-four analogy above, all the fracking in California costs them about a quarter. Worrying over fracking is like seeing an upper middle class family who are \$6,000 in debt, and freaking out because one of their kids bought a gumball from a machine.

This is from “Scott Alexander” (in quotations because it’s a pseudonym), “California, Water You Doing.” The whole thing is worth reading because it’s such a beautiful numerate analysis.

Of the 80 million acre feet a year of water use in California, only 2.8 million acre feet are used for toilets, showers, faucets, etc. That’s only 3.5 percent of all water used.

One crop, alfalfa, by contrast, uses 5.3 million acre feet. Assuming a linear relationship between the amount of water used to grow alfalfa and the amount of alfalfa grown, if we cut the amount of alfalfa by only 10 percent, that would free up 0.53 million acre feet of water, which means we wouldn’t need to cut our use by the approximately 20 percent that Jerry Brown wants us to.

What is the market value of the alfalfa crop? Alexander quotes a study putting it at \$860 million per year. So, assuming, for simplicity, a horizontal demand curve for alfalfa, a cut of 10% would reduce alfalfa revenue by \$86 million. (With a more-realistic downward-sloping demand for alfalfa, alfalfa farmers would lose less revenue but consumers would pay more.) With a California population of about 38 million, each person could pay \$2.26 to alfalfa growers not to grow that 10%. Given that the alfalfa growers use other resources besides water, they would be much better off taking the payment.

Of course, this assumes that it’s relatively easy to transfer water from farmers to mainly urban dwellers. But it’s not. Government regulation has made this difficult. Here’s a quote from a piece by Nathanael Johnson, who appears to be someone who tracks it closely:

My experience in trying to sell hypothetical water [in California] left me with the sense that the risks and transaction costs would make it prohibitively unattractive. But people still manage to do it. It’s the water districts, not the individual farmers, that take care of the red tape.

But it could be much easier. In Australia, you can do the whole deal over the internet. I talked to Tom Rooney, founder of Waterfind, an online platform for buying and selling Australian water, and the process he described sounded simpler: “You post your order up, and of course if you want too much, you won’t find a buyer right away. But if you are at the market price, it will clear that same day, and the person will have the water the next day.”

HT to Tyler Cowen.

The author continues:

In 2002, when Rooney developed his first version of the online marketplace, people thought he was crazy, because there was hardly any water market, and it was still the age of dial-up modems. “I’m lucky I didn’t get locked up in the loony bin,” he said. But Australia was also two years into a drought, which stretched on until 2010. And the water markets turned into a key tool for adapting to the drought.

As the country dried up, it was forced to make changes. Australia passed a law to clarify water rights and make them more easily tradable. It installed meters to measure how much each farmer was taking. It set strict fines for farmers who broke the rules.

There’s still plenty of complex water law and environmental regulations, but all that has been rationalized enough so that it can take place under the hood of an online marketplace like Waterfind. There are 27,000 government rules integrated into the system, Rooney said. As you move water from one place to another, if you have to leave a percentage for environmental uses or pay a special fee, Waterfind automatically makes those adjustments to the price.

Australia may seem light-years ahead of California. But as California enters its fourth year of drought, it’s edging toward the decade-long ordeal that forced Australia to rewrite its laws. If the state legislature were motivated to make the necessary changes to water law, Central Valley farmers could be trading water from their smartphones, Silicon Valley-style. And even if the state doesn’t go that far, it could improve its water market considerably with some simple tweaks. (Hanak suggests six fixes in this report.) Even in its current, cumbersome manifestation, the California water market is working — moving water to the farmers that need it most.