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If water is essential to human survival and we are running it into a state of scarcity, why doesn’t the price change? The past two blog entries on the ‘Worth of Water’ have reflected the reliance our economy has on the steady supply of water, leading to the question: what is the worth of an inch of water?

All goods have a market value, even if there isn’t a market price—but with water the value is too high to be given a suitable price. The economic paradox about the price of water versus the value originally comes from Adam Smith in the Wealth of Nations who asked: Why do diamonds cost more than water? Smith states “[n]othing is more useful than water,” but it doesn’t have enough monetary value to be exchanged for anything. On the other hand, diamonds have nearly no value in their usefulness, but are worth so much money they can be exchanged for nearly anything—leading to the question: how do you price a priceless asset?

The price of water needs to not only encompass the supply and demand, but also should absorb the cost of maintaining the quality of the water—also known as internalization. Moreover, there is hidden water use in everyday products—almost all materials and products require water to be produced. For example, it takes more than three gallons of water to make a single sheet of paperseventy gallons of water to produce one gallon of gas, and thirty-five gallons of water to produce a bicycle. Nearly everything we use, eat, and drive/ride requires water to produce.

In general, government regulations require companies that damage natural resources like water to clean up their mess. The full cost to society from the production of goods is a reduction in water resources and, if the water isn’t properly processed, contamination leads to further externalities seen in pollution and, therein, health costs where the citizens are absorbing the costs of a manufacturers externality. 

When the manufacturer cleans their own water through a waste water treatment process, they are internalizing their own externalities and absorbing their own costs. After cleaning the production water through chemistry and system treatment, the water is worth the same as when they received it from the POTW. They paid for the water, used it, and cleaned it themselves—this is known as an equilibrium where the cost for all absorbed externalities are seen in the cost of the manufactured products themselves. The manufacturer must choose to discharge the water back to the POTW or reuse it by rerouting it to the beginning of the manufacturing process to be reused. If the manufacturing facility were to discharge this water back to the POTW after the water goes through a treatment process, they would be in a constant state of cost as every time the water goes through a treatment it absorbs cost through chemicals, man power, hours, solid waste discharge, and the overall cost of operating the treatment system. However, by using a reuse system in this process and reusing their own waste water, they are not having to pay for new water from the POTW.  Manufacturers are absorbing their pollution externalities by cleaning their own water, and, by doing so, are cost-shifting their activities. By decreasing liability on their neighbors, improving safety, health, and environmental hazards, manufacturers are also phasing into a cleaner, green economy and continual economic equilibrium. 

 In a future installment, we will give a cost-based example of how environmental economics works in the industry setting.