Question

During the California drought, one California community tried to reduce its residents' water consumption by imposing an escalating water price (the marginal price of water rose with monthly use by households). A state judge ruled that the pricing system violated the state's constitution, which required that water be priced no higher than its cost. Since the cost of securing water had not risen, its price could not be increased. Was the judge's ruling correct on an economic point, that the cost of water had not risen during the drought? (before trying to address that question, you should reflect on the meaning of "cost" of anything and on whether the cost of anything goes up when it becomes scarcer.)

Answer 1

When demand for a commodity increases the price of the commodity also increases. During droughts the demand for water is very high. Costs of a commodity also includes opportunity costs- what you have given up. During droughts people are willing to sacrifice more to get water and as a result the opportunity cost of consuming water increases and increases the total cost. Hence the judge's perception that cost had not risen is incorrect. But the ruling cannot be seen as incorrect because water is necessary for human survival and charging high price for water during droughts can have adverse impact on the society with many weaker sections of the society deprived of water and there by reducing the welfare of the country.