There's a classic economic paradox about the price of water and value, and it comes from Adam Smith: Why do diamonds cost more than water? The comparison is meant to demonstrate how pricing works—that even though water is essential for human survival, our economy puts prices on things based on scarcity and value (and marginal utility). As long as water remained abundant, the cheapness of water would likely not change. But the price of water has come into serious question as drought-struck California and Western states debate whether water is too cheap.
"We Americans are spoiled, we wake up in the morning and we turn on the tap and out comes as much water as we want for less than we pay for cellphone service or for cable television. So we take water for granted," says Robert Glennon, a water expert at Arizona University and the author of Unquenchable: America’s Water Crisis and What To Do About It. "We all pay a ridiculous amount of money for the water."
How "ridiculous" exactly? Currently, water pricing is largely based on delivery—that is, the cost to get water from the source to the consumer. In some parts of the country, consumers are not even paying the cost of delivery while in other places, such as Sacramento, some houses don't even have water meters. "None of us are paying for the water itself...economists talk about the marginal cost of water, and very few places in the country are people even paying for the marginal cost," says Glennon.
Economists argue that without real prices and measurements that would determine cost, there's no incentive to conserve consumption. But these prices and systems were set in a time when water shortage wasn't a huge issue. Richard Carson, an economics professor who specializes in natural resources at University of California San Diego, says that caps on water prices were set in part so municipalities could not abuse the utility for profit.