Pike Family Nurseries–A Case for Water Market-Pricing

Pike Family Nurseries is the nations largest family-owned and operated retail nursery. Headquartered in Atlanta, Georgia, Pike Nurseries employs 700 people at more than 20 retail locations across the southeast. It is one of the more recognizable businesses in the state and a shining example of what one man and his family can accomplish with vision and hard work.

Oh, and two days ago, it filed for chapter 11 bankruptcy.

According to Pike’s CEO, the severe drought and its water restrictions have severely damaged Pike’s business:

“Our core Atlanta area market is currently suffering from the worst drought in over 100 years,” said Scott Schnell, chairman and CEO of Pike.” This extended drought and resulting water use restrictions have had a material detrimental effect on our business[…]” (emphasis mine)

While the Governor is busy holding public spectacles and accusing the State of Alabama and the Army Corps of Engineers of being in cahoots to “dry up” the State of Georgia, it’s easy to forget that some people are severely affected by the water shortage.

The drought, however, is not Sonny Perdue’s fault. It is not the Republican-controlled State Legislature’s fault. And even though most of this 100 year drought occurred during Democratic rule of the state, it’s not their fault either. And although we cannot control nature, be it through science or religion and even though we lack the ability to prevent severe water shortages (we can’t build an infinite number of reservoirs), we still have the ability to effectively manage those shortages without using price controls, punishment, or watering restrictions. We have the ability to prevent businesses like Pike (who employ 700 people) from filing for bankruptcy.

The answer is almost too simple. We need to market-price water. Treat water just like any other commodity. As Thomas Sowell writes, economics is simply the efficient allocation of scarce resources. I don’t think anyone would argue that water is a scarce resource at this point. Are we efficiently allocating it though? I still see sprinklers on in the mornings driving down Mansell Road. I personally take extremely long showers (sometimes more than one per day). And it doesn’t take a genius to point out who is and who isn’t watering their lawns in my neighborhood. I would say the answer is “no”. We’re not allocating the resource very efficiently.

The problem with water’s allocation is that its price is not established based on its scarcity. Its price is set by government bureaucracies, many of which are composed of people with no true ability to allocated much of anything. They keep the price low so “everyone can afford it”, and as a result, they’re getting us to the point where “no one can get it”. So, rather than allowing the market to price water based on scarcity, they just restrict use of it. And as a result, businesses who rely on it, like Pike Family Nurseries, file for chapter 11 bankruptcy, and the amount of water we have left continues to decrease.

Price controls do not work. Watering bans do not work. Building more reservoirs…eh, it’s a good idea, but it still doesn’t solve the problem of water restrictions. Market-pricing of water does solve that problem. By allowing the market to price water based on its scarcity, you can cut back on all of the wasteful uses of water. People could still choose to outdoor water, or take long showers, or run their sprinklers…but they do it at the peril of their own wallets. What will happen is that use of water will decrease and we won’t have to worry about holding prayer vigils or sending the Governor to Washington.

Moreover, businesses that rely on water, such as car washes and Pike Family Nurseries wouldn’t be restricted on their water usage. Pike could still water it plants. The price of the plants would necessarily reflect the rise in the price of water, but the plants could still be sold. Selling fewer quality plants at a higher price is definitely better than selling fewer dried-up plants at an anemic price.

Market pricing of water is a win-win scenario for everyone.

26 comments

  1. Jace Walden says:

    YourFutureLeader,

    You’re missing the point. Sonny Perdue didn’t cause a drought. The legislature didn’t cause a drought. The Democrats didn’t cause a drought.

    That’s the point I was trying to make. I agree that there are things they could have done better, that’s kind of my point in this post–market pricing is one of those things.

    But to think that Sonny or the Republicans or the Democrats have literally been preventing rain for the past 100 years is kind of stupid.

  2. cheapseats says:

    OMG! Another “solution” that is simple, obvious, and wrong!

    I’m not totally opposed to a tiered pricing structure for water but anybody (and there are lots of them) that thinks that this is “simple Econ 101” needs to try studying more advanced economic theory. Not everything responds to supply/demand pricing – there’s a factor known as “elasticity”. Maybe you should look it up.

    When you get down to things that are necessary to preserve life, you’ll find that trying to apply simple (overly simplistic) economic theory will not have the effect you think.

    I mean, just look at gasoline – huge increases in prices have had almost no measurable effect on the demand.

    The moron that is using 400,000 gallons of water can easily afford it. He would use the same amount if water were $1 per gallon. He can afford it so he thinks it is his right to have it.

    On the other end of the spectrum, poor and middle-class folks (some of you conservatives may need to look those folks up to refresh your memories) must have water and they’ll have to pay whatever it takes to get it. Just like they have to buy gasoline to get to work. So, there will be no measurable decrease in consumption – just a higher price to pay for it.

    I could go on about this for hours but, if you really are still taking long showers – STFU!

  3. Jace Walden says:

    I am taking long showers, and believe it or not, I am solidly in the middle class, if not just below it. I promise you that if water was priced based on its scarcity, my showers would be shorter.

    The moron that is using 400,000 gallons of water can easily afford it. He would use the same amount if water were $1 per gallon. He can afford it so he thinks it is his right to have it.

    This is a bunch of class warfare bullshit based on nothing more than opinion.

    If you think that higher gas prices haven’t affected demand the marketplace, then you’re also dreaming. Look at the types of vehicles people are buying now. Smaller, more fuel-efficient, and some hybrid. All to cut down on the amount of gas consumed. The large motor companies can barely give the gas guzzling trucks away these days. The demand for gas is there, but people are finding better ways to allocate their use of it.

  4. Chris says:

    I mean, just look at gasoline – huge increases in prices have had almost no measurable effect on the demand.

    Incorrect. The SUV market is tanking and gas efficient cars are in more demand. Diesel cars are in more demand, and (at least by observation of price) diesel demand is up.

  5. mondaymorningqb says:

    While I love a good discussion on the merits of resource allocation and pricing, PP missed the real story with Pike’s bankruptcy and it has nothing to do with water restrictions.

    The drought is a convenient cover for the mismanagement that has been taking place since 2004 when Roark Capital took over from the Pike family.

    Over-expansion and underfunding is killing Pike, not the lack of rain. To suggest otherwise is disingenuous at best…..

  6. cheapseats says:

    There is pretty much no anecdotal or hard evidence to suggest that it is the price of gasoline driving consumer’s choice of vehicles. But, that doesn’t even factor into the crashing and burning of your argument made of straws. The fact is that we are still buying as much gasoline as we ever have. The rising price of energy is, in fact, having a far greater effect on the purchase of most other discretionary goods and services. We’re not buying less gasoline because it is scarce or priced as a scarce resource – we’re buying less of other things.

    The same will hold true of water pricing.

    You cannot buy your way out of a drought. Especially ironic since we pretty well sold ourselves into one. Well, not the drought so much as the scarcity of the water and the rapid depletion of any reserves.

    I can’t recall the exact quote but it involves something about waking up and discovering that you cannot eat money. You can’t drink it, cook with it, or bathe with it, either.

    Interesting comment from mondaymorning as I know of at least one other green industry business that failed and tried to blame it on water restrictions until it was revealed that they basically had imploded their own business well before water restrictions went into effect.

  7. Doug Deal says:

    cheap,

    Jace and Chris addressed your comments on price not effecting demand, but let me add something regarding supply.

    Current non nuclear utilizing technology can supply desalinated water at about $900 per acre foot of water (the standard measurement of reservoir sized water units). A half acre foot is enough for a single household for an entire year, so $450 a year per family or $40 a month. (This would be in addition to your current monthly bill, as that is mostly treatment, delivery and maintenance of equipment).

    So, for double the current bill, you could supply limitless water from the ocean using high pressure membrane separation and never have to worry about personal water consumption again.

    The problem is that water is not allowed to float with market conditions and is provided “for free” so there is no profit incentive or reason to supply water from alternative means.

    If water had a cost 3 times what it does now, desalination would be easily profitable. But, as long as we refuse to allow economics to function properly, this will never happen.

    Also, desalinated water has close ties to nuclear power, since the electricity demand would be met so easily, so it’s a win-win.

  8. Jmac says:

    I was going to mention what mondaymorningqb said. We had a similar instance here in Athens-Clarke County where a local nursery is closing its doors blaming the drought and restrictions, but they had been losing money pretty steadily for the past few years based on increased competition that offered comparable products and more affordable prices.

  9. Jmac says:

    I am taking long showers, and believe it or not, I am solidly in the middle class, if not just below it. I promise you that if water was priced based on its scarcity, my showers would be shorter.

    I take shorter showers now because that’s the appropriate and responsible thing to do, isn’t it? I mean, saying you’re taking longer ones, using more water and impacting others, just because it doesn’t cost anything additional just reaffirms every negative stereotype about libertarianism, doesn’t it?

    And I’m not disputing that a higher price wouldn’t deter you, but I’m just kinda stunned that you brag about taking long ones despite voluntary requests for you to think of how best to manage what is a communal resource.

  10. juliobarrios says:

    I don’t care how rich that guy is after a couple of $400,000 water bills I think he would scale back.

    One only needs to look back to the 1970’s oil crisis and the small cars that flooded the market to see that pricing does work.

    You’re muddling a lot of issues together concerning the tiered pricing system. You’re whole “When you get down to things that are necessary to preserve life” argument is actually supporting the tiered pricing system. That’s the point – to make sure people get the bare necessities at a reasonable price.

    Keep in mind, what the Metro area uses is peanuts compared to what is being sent down to the ocean. Of course you’re length of shower time and it’s relevancy to the drought / Chattahochee flow only matters if you’re on a septic system.

  11. juliobarrios says:

    Mondaymorning-

    I wondered whether is was the drought or bad management also. But you’ve got to remember that this drought in the face of mass expansion (and the debt coupled with it) would be a formula for disaster. I’ve heard a number of landscape companies state their business is down 80% – I don’t know too many businesses that could survive an 80% drop in sales for very long.

  12. juliobarrios says:

    Jace-

    I’d say you wrote a pretty good piece. The only thing I would add is that market pricing and adding more reservoirs are mutually exclusive of each other when it comes to drought solutions. Whether you want to point fingers at Sonny Perdue, past administrations, Democrats, Republicans, illegal aliens, yankees, developers, George Bush, global warming or Bill Clinton is irrelevant to our current problem and the need for a emergency measures. Sure one solution is to hire an army of water police and enlist water neighborhood watch programs, but I believe a more effective and efficient solution would be to simply raise the price.

    The market price should be set according to how much supply we have left in our reservoirs. If the price is too high, as a result of low reserves, then we should consider adding more reservoirs as a means of lowering the price of water. To continue to price it as if there is an unlimited supply, which obviously there is not, is insane.

  13. Still Looking says:

    The number one recommendation by the Water Planning District is for local governments to adopt new pricing systems. This recommendation came out several years ago and most local governments have adopted tiered pricing. Cobb adopted a new structure and people started complaining; so apparently people will respond to pricing. The recommended structure is low for the basic needs of a household and ratchets up as the household uses more. However, pricing does not consider household size. A single person gets the same amount of water at a cheap price as does a family of five. This is where some personal responsibility kicks in to curb long showers and needles running at the sink.

  14. Jace Walden says:

    Jmac,

    Honestly, my showers aren’t any shorter or longer than they were before the water restrictions began.

    You made a good point, I’m not a responsible citizen when it comes to water restrictions. I guess I’m more cynical because I can spot the houses that water their lawns, plus I see the sprinklers on Mansell Road every morning.

    With our current pricing system, there is no incentive for me to be responsible. That’s just tough. That’s the problem with price controls in general, they don’t create incentive. Let the market price the water and I promise that people like me will be much more responsible.

  15. juliobarrios says:

    Still looking-

    I know a lot of municipalities have implemented the tiered system, but to not change the pricing in this emergency situation defeats the purpose. The pain threshold on the high end needs to be exponentially higher.

    I agree the system is not perfect and it does not take into account multiple member households and perhaps there should be some personal responsibility that kicks in for a single member household, but there are plenty of other government pricing structures that reward multiple member households and penalize single member such as public education.

  16. BubbaRich says:

    Jace:

    You’re still missing the point. The wasters can afford to waste water on long showers, watering their lawns, and wherever else they’re sticking a hose, even if the price is high enough to price lower middle class out of the necessary water market, say for bathing, sewage, and drinking. There is no price that would restrict wasteful usage by wealthy people and allow necessary use by less wealthy people. A market would settle out too high to allow even limited use by less wealthy people.

    We’re fine with that if it’s Coca-cola or Faberge eggs, but we still have a social responsibility to provide water service, even to poor people.

    A tiered service might work for that, but some of you oppose that, too.

  17. We don’t what the elasticity of water really is because it’s not subject to market prices. I suspect it’s rather like gasoline but as Chris points out high gas prices are forcing changes to the marketplace.

    Without a doubt Jace is correct, allowing the market to set the price of water would help prevent shortages. The drought we’re in currently is extremely rare in it’s severity and I suspect we’d still have suffered pain even with market prices for water. However the market would have begun to make corrections long before the government did and thus solutions would have appeared much sooner.

    For those interested here’s a brief description of elasticity. Cheapseats is correct that elasticity is an important consideration, but even with inelastic goods like gasoline, the market moves to make corrections. Demand for inelastic goods may not decrease all that much but other solutions appear when the government gets out of the way and let’s entrepreneurs do the heavy lifting.

  18. gatormathis says:

    “So, for double the current bill, you could supply limitless water from the ocean using high pressure membrane separation and never have to worry about personal water consumption again.”

    Folks, we had better get “locked on” to the realization that there are no “limitless” resources. Almost everything is in a finite supply, whatever it is.

    Whether a supply of something ends today, or eons away, it will end one day.

    What happens when the ocean begins to look Lake Lanier after tears of desalination? Especially with the H2O theory of seperating water into oxygen and hydrogen for fuel.

    “Burning” water, go figure.

    The wind, solar and other types of energy are where we need to be headed, there just won’t be the “sales” of items to make commissions on that drives the economy today.

    How many windmills would a billions of dollars nuke plant put up, all which could be located closer to there needed consumer.

    Plus we need to be switching over to DC power which can be stored, for lights and low power apps, and used as needed, or saved until needed.

  19. Doug Deal says:

    Gator,

    I can see that you do not have a background in science.

    The piddly amount of water that humans use for all purposes is less than a drop in the bucket when compared to the seas. Imagine if your appetite was a grain of rice a day, how long would a silo full last?

    Besides, the ocean is not de-salinated, water from the ocean is. That means that the salt that is returned to the ocean is returned in the form of slightly enriched water, while pure water is then available for use.

    Further, all water eventually returns to the oceans, so nothing is actually consumed. Even “burnt” water that is seperated into hydrogen/oxygen is reformed as water, and is also not consumes. Membrane seperation is not a hemical process, it is simply a way to filter out salt.

    The only resource that is then consumed in the process of desalinating water is energy. Energy is limitless as far as human lifespans go. The earth has enough uranium to last 100 billion years at man’s current energy needs. This does not include Mars and venus or the moon which could likey have more.

    The wasted uranium impurity in coal has more energy potential than the coal itself. There is also Thorium, which is even more plentiful than Uranium.

    The only reason we entertain the idea of an energy crisis is because uneducated iditos derailed the the program in the 80’s like cave men reacting out of fear to fire or the wheel.

    Wind would require about 700 300 foot tall structures to be built in order to equal the power generation of 1 nuclear reactor (1 GW versus 1.5 MW).

    Wind is a fairy tale, as is ethanol, bio-diesl, solar, and wave energy. Hydrogen is also not an energy “source” buy an energy storage medium, there is almost no free hydrogen anywhere on the planet. All the mechanism for obtaining it mean blowing more of another form of energy in it’s production than you can recouperate by using it.

    Anyone against nuclear power is an obstructionist to human progress, and freedom.

  20. Doug Deal says:

    jsm,

    The price of gasoline is irrelevant as model for water for many reasons.

    The great majority of the consumption of gasoline comes from the irreplacable uses in commuting to work, and transportation of goods. Very little can be said to be discretionary. If one chose to not use gasoline to go to work, for he most part he would be fired and the decision would be more costly than maintaining the status quo.

    With water, only a small fraction is actually neccessity use, much like electricity. Plenty of people set their thermostats on 80 to save 100-200 a month. This is because a/c is more luxury than anything else.

    Neccessity water is having enough to drink, enough to bathe and enough for sanitary purposes. Faced with a $150-300 water bill, you would be amazed at how quickly people would stop hand washing dishes, showering multiple times a day, leaving faucets running while shaving and running half full top loading washers. And, that is only a small fraction of the waste. The biggest waste come from outdoor uses. Most people are not going to water their acre plot if it means paying 500 a month. The few tha do will not add up to a hill of beans. For every household using 400,000 gallons a month, there are 100,000 or more using the average 12,000. In the end that averages to an extra 3 gallons per household. The answer does not lie in class warfare, but in the average user.

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