Planet Money - SUMMER SCHOOL 4: Pistachios & Scarcity

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Hello and welcome to Planet Money summer school, the only educational institution in the world. That isn't freaking out right now. This is class number for scarcity and pistachios. I'm Robert Smith every Wednesday till Labor Day. We are teaching you to look at the world through economic eyes, and we're halfway done. Don't worry no midterm, but there will be a final exam and a high-quality certificate at the end that just might in certain lighting conditions be mistaken for a diploma. You know, who else is fancy diplomas Betsy Stephenson and Justin wolfers from the University of Michigan Hi. How are you today? I'm so excited for this is all about making individual decisions to maximize Fun and Profit. We looked at cost-benefit analyses markets and prices and it was all nice and orderly but but this is the part of the course where things

Things are going to get messy the world's messy. Look economics isn't just about you making your decision. It's about how people interact when we put them together in my pockets. When we have foreign countries when we have governments when we have the materiality that your choices can mix things up to me. And that's what we're going to do in the next few episodes have impacts on other people think about something as simple as your personal decision about whether you wear a mask and the middle of a pandemic. Choice is not so much about you. It's actually about the impact you're having on other people and whether you're spreading your germs to other people there's a technical economic term for this which is externalities externalities. How do they come up with? So what I think about externalities I think about the side effects. These are the side effects on people who are neither the buyer's or seller's in a transaction there just the bystander.

The innocent bystanders who are going to have some side effects from your choices. Well Economist think of them as external to that transaction. Hence the term externalities. Alright, so everyone should listen for this concept of externalities that the impact of decision has on other people as we listen to a Planet Money story from 2015 called the bottom of the well, I co-hosted it was Stacey Vanek Smith. She traveled out the California Central Valley during this huge drought to meet people who are living without running water in the city of Porterville. The city has set up his kind of temporary facilities portable showers and sinks. I went and visited one. It was in the parking lot of a church and they kind of look like an airplane bathroom. They had little benches and shower heads and a curtain and out in the blazing hot afternoon sun or rows of sinks with mirrors and people come there in the morning and shave before work. It was really grim.

Well, I was walking around a car pulled up and Karen Hendrickson roll her window down. So at what were you hoping to get today water today for our house the drinking water because our well is dry. So we come here for support on drinking water. How long ago did you're welcome dry. It's been a year already low. I need for a couple times a week. But me and my daughter she comes in and I come so could we drink a lot of water a lot security guard security guard says no, we're out I come back tomorrow.

Who was heartbreaking about all of this is that their fee is actually water still left in the valley. There is water literally below Karen's home. There's a giant Aquaphor entering used to tap into it with well, but the level is getting lower and lower and lower. So she and her neighbors can't reach it anymore. It's like this race to get the water Karen and the people here locked out of the race this water people who are still in this race. Not that far away from Karen's house. You see it acres and Acres of lush Farmland corn cotton Tomatoes. Pistachio trees walnuts almonds. This is where Cairns water wet.

Today and Planet Money summer school will look at the screwed-up economics of drought. Why is it so lucrative to use up more and more of a scarce resource in this case water, but the lesson applies to just about everything in the world and if you think about externalities, can you set up a system where everyone gets what they meet.

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Marquardt Farms 3,000 acres in California Central Valley and Mark is a very energetic I super organized. He likes to pay playlist to the steering wheel of history. Is that a to-do list on your steering wheel and we're driving across his farm his Fields stretch. As far as the eye can see that beautiful black eyed peas and corn and cashew trees is to credibly Lush and green. And the reason for this is that marks mom sits on top of that Aquaphor the same aquifer that Karen's house. Well used to tap except he's better getting to the water. He is better at getting to the water but it's getting harder and harder even for Mark the level of the aquifer has been dropping really fast dropping 10 feed a week, which is amazing 10ft a week. And for the week, in fact half of the Wells on his 3000 acres have dried up. He shows me one.

That sucks should be producing water. It's not to see if there's any water in it. I said this is a good sound you like this pipe sticking out of the ground. He was right. I like the sound.

Water always that was there white water you supposed to water down there, but the pump that was here wouldn't reach that water anymore. We have to deepen it as fast as he can in New Wells. He's putting 8th at a cost of around two million dollars. And the reason for this is all around us pistachio trees. They're little baby ones. He's just planted there like up to your hip height of these little steaks and they're bigger ones in the next field with a clusters of pistachios almost ready to pick. These are the pistachios.

There you can see it's about half developed are very thirsty. It takes almost a gallon of water to grow one pistachio and a gallon of water to grow an almond nut trees are some of the thirstiest crops around and yet here we are in the middle of a drought and Mark is planning pistachio trees as fast as he can. Why are you planting so many new trees right now?

We just think it's financially it's the right decision to make once they get up into production. We hope to make good money. There. Are they pretty profitable wildly profitable really Yes, actually 10 times more profitable than most other crops for pistachios marketing make $10,000 an acre for most other crops $1,000 an acre. The reason for this is both supply and demand the demand part is that people are eating more nuts people in China and India are discovering them. And so there's a much bigger market for nuts. But the supply side is also important to the reason why they can make so much money off of these crops is because of the drought the drought has made pistachios and almonds harder to grow rarer and as a result the prices naturally shut up. So everyone is planting them and when you drive to California Central Valley, it's striking. All of the fields are these new trees farmers are ripping out their old crops and putting in nut trees.

And it becomes will probably hear the stories about hedge funds and big Banks buying California Farmland in planting almond and pistachio trees because hedge funds and banks have plenty of cash up front to drill these really deep well tap the aquifer get the water first and the pan for them could be huge and this is being reinforced by the market right now because crops that do well in droughts. Did you not bring in that much money and if you're running a farm and spending hundreds of thousands of dollars to drill new, well, you are not going to make that money back planting drought-friendly crops Iran the Spy Marquardt Sasha farmer. I mean should you be planning something like flaxseed or safflower here instead of pistachio trees?

Should I be planting in I don't know. I mean, we're trying to make money here.

Economist have a term for this race for scarce resource this dilemma and you probably heard it. Even if you haven't taken economics class. It's called The Tragedy of the commons. If you have a shared resource say I am better wear your cows graze or an underground Lake people will use as much of it as they can't they will use a public resource until it's gone any bad guys in the scenario is fit. Actually everybody is acting rationally. It's just that what is good for the individual and what is good for the group are totally different take Farquaad e the statue farmer if you were to cut back his water use he would just lose out his neighbors would use the water hedge funds would use the water. They would make the $10,000 an acre and he would be stuck with a bunch of safflower that's not worth very much. I keep drilling deeper and his neighbor's look at that and they drill deeper to and this race this race were talking about becomes frantic race. You better pick up the phone and call somebody like Steve Arthur.

So do you mind reading the back of your truck says Arthur and Orum? Well drilling Fresno we leave you with.

That's amazing. That's amazing is always what I say when I don't know what to say and he actually mostly works out real site to drill site all day.

I get 40 or 50 calls a day easy. I can't even keep track of what the office gets. All the farmers are completely running out of water.

Realistically at least a year wells around here used to be about 200 feet deep but these days Steve is drilling Wells that are as much as 2000 feet. His company has started buying equipment off of oil drilling companies like fracking companies in order to get deep enough to get to the water and modern Technologies taking care of that now so we started drilling deeper up there. That's what we found aquifers nobody's ever touched and you know how this as you go deeper and deeper you take more and more water out of an aquifer eventually it is going to go away and when we talked to the water scientist, we asked him how much is left at this pace and he said maybe 50 years 50 years worth of water in the aquifer at the outside a hundred years. And when I asked him what would happen when the water ran out what that would look like. He actually reference the movie Mad Max.

Can people driving around the desert fighting each other for water? Because that is one of the logical ways that the scents the water goes away the wells go dry and all the sudden knowing Chris pistachios anymore doing anything anymore. We're talking about functionally a dust bowl happening in the Central Valley could be regulation government steps in and says, hey you have to limit your water. You can only drill this deep. But so far at the state has been reluctant to do that. There is one other option though one solution to the tragedy of the Commons. In fact, there's an economist named Ellen arrastra. We've talked about her here before I'm Planet Money. She won a Nobel Prize for her work on the tragedy of the Commons in 2009 and her work showed that sometimes this does not end badly and some of it doesn't end in the government coming in putting on these rules and regulations in place. She said that people can come together and work out a solution for themselves. They can basically put the interests of their group ahead of their immediate interest sort of decide.

Not to race but this is not easy as you can imagine because basically you have to convince people to give up their personal short-term interest for the long-term interests of the group and this is not exactly how humans are built. This is not what we tend to do naturally but I did manage to find some people who are trying it north of Mark Whitey's pistachio Farm in a town near Sacramento. I'm an attorney lawyer in Texas. They call us Liars in there as what's happening down south. The community was running out of water. Everyone was using as much as they could as fast as they could and he thought to himself this race that's happening is going to end badly we should get together and try to stop it because sooner or later the government will come in and limit our water use. We don't know when and we don't know how much so he got a group of farmers together about 500 of them.

Stockton California, and he said listen, I have a proposal. Why don't we voluntarily cut our water used by 25% and if we do that the government has said it will not come in later and cut our water this way you get certainty. You know, what you can do you can play in your survival which might have been hard for the farmers there because in this community water is Muddy Water means crops crops me money and he's basically coming in and saying to them I want you to take a 25% pay cut and didn't want to do that. It was extortion.

They didn't like it but in the end half of the farmers signed up to do this and Paula does Nair was one of them. It's costly it's not ideal cuz this is your livelihood how it was a dairy farm in Lodi, California and she grows a lot of corn for her cows for her girls as she calls them using 25% less water will mean pilot will have to buy a lot of the food for her cows. And that is a lot more expensive and that means the best Paul is going to be able to do this year is break-even, but Paula took the deal because she's been hearing all of these horror stories about her neighbors getting their water cut off entirely as in the government coming in and saying no more water for you and the farmers are stuck the crops are halfway grown. They have no water to finish them still the decision weighs on her you want to do what year part better if you want to make sure I hope that everyone is doing their part because it is it is a financial burden.

You can hear her anxiety in that laugh because this particular solution to the tragedy of the commons can be brutal. If it turns out that the government does not put any new rules in place of the government does not make you cut back on your water. Then you've just giving up your profits for nothing, but you will feel like a chump the farmer started cutting back last month and so far people seem to be sticking to it and it's gotten a lot of people asking could this work in other parts of California? Is this possibly a solution to the drought? I put this question to Mark White eat the pistachio farmer with the dry Wells. I asked if farmers in his area might come together in the same way. Would something like that work here. It's like everybody got together and agreed to use less don't pump as much or something like that. I just now, I know see that. How come

I don't know. I just a group of number one. You could you couldn't get consensus if you had only five Farmers. I don't think you could get consensus if you got 500 Farmers. I know you couldn't get a consensus. So I just don't think it would be a practical thing to try. Let me right now. You know, you just did theirs is water down there and you got Haves and Have Nots and the haves. I don't think we'll be in a mood to share with the Have Nots. So yeah.

All this is a pump that has a was put into service in 1946 and has Faithfully produced water and I expect a week from now. It will not be functioning any morning to be dry. So it's just a

another one that has is going to go by the wayside here quickly. What does it feel like to see it doing that?

I purposely don't drive by it and when I do I look the other way.

As I was driving around the farm with Mark. I kept asking him over and over why he's doing what he's doing why he keeps drilling deeper and deeper wells and why he keeps at the same time planting crops that need so much water. What is the future here? And he told me there is still a lot of water left in this aquifer, and he thinks things will turn around. He kept telling me it's going to rain next year. It's going to rain next year.

That was Stacey Vanek Smith from back in 2015 in the year since we first aired this episode a new California law has gone into effect that requires communities to monitor the level of the groundwater and to come up with individual plans to make sure that they're not taking more water out in the rain is putting back in when we return will bring in the summer school Economist to talk about the fast ways to make sure the Californians are actually showing the water and they'll show us how the economics of externalities just might save the world.

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Back with us or our Economist in Residence this summer Betsey Stevenson and Justin wolfers from the University of Michigan and and Betsy you use this episode in one of your classes in order microeconomics classes. I do it is a great episode because I want to get students to think about the kind of problems that we face when we're all try to share a common resource. This problem comes from a specific kind of classic Goods where they are rival that means that if you use all the water, there's no water left for me, but it's hard for me to prevent you from taking the water not that's what a condom is called non-excludable go through the different types of solution as Economist. Think of that I mean,

The one that would work is that if everyone just suddenly realized that they were sharing a common resource and everybody just used last the people in the story seem to think that that is just not a possible solution. It would be good. If everyone was was nice and took account of their effects on everyone else and they might to some extent but once everyone else is leaving the water behind you got a bit someone out there is going to think you know what I could make a whole bunch more money if I groom pistachios and just took a little bit more water and that's going to be the problem. And so does the government have to step in something's got to happen. Something's got to have the question is the who won the how

The most obvious answer so I think doing all the government if it is a different form of government, which is in we talked about in the episode. They could form in a sense their own government a local Association that says it's the local pistachio Growers together and says, let's use this valuable resource a little more carefully in a little more cleverly coordination is the threat of government regulation if they don't agree to coordinate, so they know that if they can't agree that then they're going to be bound by some other regulation. So it does come down to their needing to be something that is policy like and in this episode we talked about the great Economist Elinor Ostrom and the tragedy of the Commons in and she came up with some theories about how people can work together to solve the tragedy of the commons, but there are limitations to this right like like you

We sort of know now that there are limits to when communities can actually work out a solution. So it's going to be a lot easier to get a group of people together to come to some agreement if there's a small number of them if they have a lined interests and also if I can watch what you're doing and I can say that your abiding by the agreement you say that on abiding by the agreement that might work well in something like a family it might work well in a business improvement district, but some of the bigger issue is I think of today's episode is a metaphor for the global warming debate. They are the people who have been harmed by pollution and not just seven people in the local area and not just 8 billion people on planet Earth, but today's generation and future Generations how you get all those people in a room to cooperate including The Unborn he's obviously impossible. So what can you do here either for California's water problem or for global warming? I know this is been a huge focus of Economics over the last decade or so. So an economist look at things they say two options.

Prices and quantities. So what's the prices in California is the price of water is free. So when something is free, is it just going to use it at the wiser? They're going to have a computer. That's just a matter of how deep they can go and what the technology is rather than thinking about old. Is it worth it for me to take an extra gallon of water compared to what I get for my pistachio. Yeah. So if we wanted to do a little less what we do is make it make him pay for it. So raise the price of what they going to use less of it in the global warming context the same idea as we should impose a carbon tax making it expensive to pollute when you make something expensive people to list. All the idea is to think about limiting the quantity so we could say there's only so much water you should take out of the ground for instance in the episode. They talk about how a new regulation came and placed it limited how much you could pull out at was going to be a function of how much rain had put in so that you'd preserve the wall.

So you can limit the quantity. We also to and the global warming context we've seen a lot of countries proposed capping the amount of pollution that can be emitted by factories another problems with these quantity regulations is there can be some real distributional issues. What do you mean by distributional issues? So if we are going to set the amount of water you can pull out then we might have the government saying this is how much water the pistachio farmer can have. This is how much water the grandmother who has the Twins and her home can have even if we're going to limit the quantity of water that used we still want the water to go to the person who's going to use that most efficiently most effectively who values at the most and so if we say that this is the max amount of water we want pulled out of the ground. That's the cop that's the cap. We then want to make it easy for people to trade.

Maybe Mark the pistachio farmer gets his allocation of water and decides, you know, I'd be better off selling this water to the farmer down the road and planting those alfalfa sprouts after all instead of planting these heavy water consuming pistachios with those two words. You just said the quantity and allow people to try and you get cap and trade which is what people to propose to deal with global warming here that often talked about in the pollution context why cap-and-trade will some factories can reduce pollution a lot more efficiently than other factories can some country can reduce pollution a lot more efficiently than other countries can if we allow trade then we can actually get the most bang for our buck in terms of reducing pollution young people in a little young people feel like a wound why the problem of global warming that she looks too big and too difficult and I think learning the economics about it.

Turn that on its head we call him is understand what what causes global warming its people taking actions with an accounting for the effects on others. We know how to solve it. We have all the tools. We need to defeat global warming. All we need now is the political will to implement it.

All right, that is all we have time for in today's class. But I did want to go over some vocabulary words externality. That is the effect that your decisions have on other people and we talked about two ways in which the government can help allocate a scarce resource one through taxing that resource and the other through actually putting physical limits on the resource and cap and trade you an assignment for us today. I want to listen is to 2 as they go through the day trying to identify a common resource that they say in their lives and either ask themselves, whether it's being out of it consumed or alternately what it is that's preventing people from other country me. Thank you both very much. See you next week. I'm so excited. I always say that we're going to do taxes next week. I love taxes or at least a particular form of taxes known as tariffs. That's next Wednesday on Planet Money summer school.

Let us know when he came up with from our assignment this week analyze a common resource you share with your neighbors and send it to Planet Money at NPR. Org or you can find some Facebook Instagram Twitter and Tick Tock. We're at Planet Money. By the way, you've all been doing a great job with your assignment X haven't raided them all yet hard being a teacher today's class was produced by Lorde Hodges with help from Darien woods and Alexei Horowitz Ghazi sound design from Isaac Rodriguez. It was edited by Alex goldmark Betsey Stevenson and Justin wolfers are professors of economics and public policy at the University of Michigan. Plus they're working on a new audio course think like an economist on the Himalaya app. Enjoy your midterm break everyone. We will be back with Summer School Number 5 next week when we will tax Santa Claus.

I'm Robert Smith. This is NPR. Thanks for listening.
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