How markets can help spur innovation to solve the water crisis

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Paul Milgrom, Nobel laureate 2020, Professor of Humanities and Sciences, co-founder and Chairman of Auctionomics, Stanford Graduate School of Business, Zachary Bogue, Managing partner and co-founder, DCVC, Silvia Console Battilana, Co-founder and Chief Executive Officer of Auctionomics, Stanford University

• New technologies can help us better manage water resources and mitigate the heavy impacts of climate change.
• Collaboration between investors and innovators can lead to novel solutions that ensure the proper use and distribution of water resources in the future.
• We need to guard water as a precious commodity, and new market designs can help.

The world faces a deepening, destructive water crisis. Climate change is disrupting weather patterns across the globe. This is leaving people, farms, animals and businesses without the water they need.

The technologies and institutions that manage water cannot keep up with changing supply and growing demand. Even in wealthy regions that could previously manage water scarcity, local infrastructure is now inadequate. In California a worsening drought means regulators are imposing water restrictions.

Markets, investors and innovators should meet to address the water crisis

The good news is that economists have shown that markets can drive the development and adoption of new technologies. When we trade scarce resources freely, and with accurate pricing, users are encouraged to allocate those resources more efficiently. They tend to conserve their shares and seek novel ways to do more with less. Improved pricing also creates a demand for technological innovation, which can then enable the creation of even better markets.

Competitive markets have helped spur innovation across many domains, from better cars and household goods to improved agriculture and infrastructure.

With this in mind, we should redouble our efforts to solve water scarcity now. The crisis is only growing, but new technologies can improve water allocation systems.

Modern technologies can help establish new markets. Peer-to-peer markets like eBay use internet connectivity and search capabilities to help buyers and sellers find each other. Airlines use aggregated information and pricing models to sell seats on their planes without overselling flights.

Carbon cap and trade programs rely on distributed equipment that accurately measures individual pollution sources. Some markets, like auctions for radio spectrum licenses, simplify purchases for participants using cutting-edge computer science. In each case, the markets themselves could not exist without supporting technologies.

Deploying the latest tech to analyse water scarcity

Powered by artificial intelligence and the falling costs of cloud-based computing and data storage, new technologies can map the full scope and scale of water scarcity.

Local and remote metering—combining on-site Internet-of-things sensors and aerial surveillance—can assess where water use is inefficient. From space, satellite companies are measuring how transnational rivers are used and abused, as well as the state of different countries’ water reserves.

In the longer term, more advanced technologies, including sustainable and profitable wastewater reuse through ultra-filtration membranes, and the discovery, extraction, and desalination of water from new sources, can deliver a future of true water abundance.

Water markets to protect water resources

These new technologies are valuable and will be critical to develop improved water markets. Effective water allocation will depend on the same innovations that underlie other recently-established markets. Buyers and sellers of water rights need a centralized market to find and arrange trades.

Water users need modelling to tell them how water consumption affects their neighbours – and to set prices accordingly. Regulators require cutting-edge economic theory and computer science to establish and maintain markets for water that are simple, fair, and efficient. Everyone would benefit from data concerning when, where, and how water is used.

Economic market design and technological innovation are mutually reinforcing. Both are needed to address the water scarcity crisis. It isn’t enough to develop water tech and regulations independently.

For new technologies to best support efficient water allocation—and for markets to spur other water-saving inventions—there must be a direct collaboration between market designers and innovators.

The gains of collaboration can be enormous. The FCC’s $19 billion Broadcast Incentive Auction, for example, used new economic theory alongside computer science. It produced a hugely successful reallocation of spectrum rights, which could serve as a model for water distribution and water rights.

There is a genuine opportunity to recreate the success of the Incentive Auction in the context of water scarcity. Aligning investments in new water technologies with the needs of regulators and market makers can lead to improved allocation of water resources.

It is important for stakeholders, such as the World Economic Forum, to bring together industries, governments, and academics to develop new solutions to the age-old (but growing) water scarcity problem.