During dry years, water becomes scarcer, and, economically, people should pay more for it. But most urban residents do not pay directly for water scarcity. We only pay the financial cost of providing water through pipes, pumping, treatment plants, and reservoirs. We do not pay for the lost value that water would have had for environmental or agricultural uses outside our communities or the value of that water to other water users in our community.
These scarcity costs are real and including scarcity costs in water rates would appropriately increase incentives for water conservation.