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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 four, scarcity and pistachios. I'm Robert Smith. Every Wednesday to 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 has fancy diplomas?


Betsey Stevenson and Justin Wolfers from the University of Michigan.


Hi, how are you today? I'm so excited for this episode. You say that for every episode they're all about economics.


I feel like our first three classes were all about making individual decisions to maximize fun and profit. We looked at cost benefit analysis, 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.


Yeah. The world's messy economics isn't just about you making your decision. It's about how people interact when we put them together in markets. We have foreign countries, when we have governments, when we have the messy reality that your choices can mess things up for me. And that's what we're going to do in the next few episodes.


The reality in life is that, you know, the things you do 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. Right. That 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 that? So when I think about externalities, I think about side effects. These are the side effects on people who are neither the buyers or sellers in a transaction. They're just the bystanders, the innocent bystanders who are going to have some side effects from your choices? Well, economists think of them as external to that transaction, hence the term externalities.


All right. So everyone should listen for this concept of externalities. That's the impact the decision has on other people as we listen to a Planet Money story from 2015 called The Bottom of the well, I cohosted, it was Stacey Vanek Smith. She traveled out to California's Central Valley during this huge drought to meet people who were living without running water in the city of Porterville.


The city has set up these 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 showerheads and a curtain. And out in the blazing hot afternoon sun were rows of sinks with mirrors. And people come there in the morning and shave before work.


It was really grim. And while I was walking around, a car pulled up and Karen Hendrickson rolled her window down. So what were you hoping to get today?


Water today for our house. The drinking water is our well is dry. So we come here for support on drinking water. How long ago did your well go dry? It's been a year already. Wow. Yeah, it's been a year. How often do you come here? Oh, these were a couple of times a week. My, me and my daughter, she comes in and I go because we drink a lot of water a lot here and ask the security guard you have any water today.


The security guard says, no, we're out. Got to come back tomorrow. Thing is heartbreaking about all of this is that there is actually water still left in the valley, there is water literally below Karen's home. There's a giant aquifer and Karen used to tap into it with her. 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 lost out on the race.


But there are people still getting this water, people who are still in this race not that far away from Karen's house. You see it, acres and acres of farmland, corn, cotton, tomatoes, pistachio, trees, walnuts, almonds. This is where Karen's water went today on Planet Money Summer School. We'll 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 need? Economics is about more than just charts and graphs, mainly it's about people. If you ever see Lincoln squinting on a penny, it's because I squeezed the crap out of it.


People opening businesses, following their dreams, struggling to build something in a chaotic world.


I just remember downtown burning.


It got real crazy real fast. On the indicator from Planet Money, we bring you easy to understand explanations and human stories to help you make sense of the economy. And we do it in just 10 minutes a day.


Until recently, Edwin Hong says he didn't speak out against racism because he was scared.


My parents told me not to speak up. I was. I'm tired of this. Listen now on the Code Switch podcast from NPR. Markwayne farms 3000 acres in California's Central Valley, and Mark is a very energetic guy, super organized. He likes to tape lists to the steering wheel of his truck.


So is that a to do list on your steering wheel? It is. It is. Yes, it certainly is.


We're in Mark's truck and we're driving across his farm. His fields stretch as far as the eye can see, beautiful black eyed peas and corn and pistachio trees. It's incredibly lush and green. And the reason for this is that Mark's farm sits on top of that aquifer, the same aquifer that Karen's house well used to tap. Except he's better at 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. It's been dropping 10 feet a week, which is amazing, 10 feet a week, 10 feet a week.


In fact, half of the wells on his 3000 acres have dried up.


He shows me one that should be producing water. It's not if there's any water in it. So this is a good sound. You'll like this.


Mark picks the rock up off the ground and he throws it into the well, a little pipe sticking out of the ground.


He was right. I liked the sound.


Water. Oh, is that was there was water. Yeah, yeah, there's water down there, but the pump that was here wouldn't reach that water anymore. We have to dip in it.


Mark is deepening wells as fast as he can, and he's also putting in new wells. He's put in eight at a cost of around two million dollars. And the reason for this is all around us, pistachio trees. There are little baby ones. He's just planted there, like up to your hip, tied to these little stakes. And there are bigger ones in the next field with big clusters of pistachios almost ready to pick.


These are the pistachios.


Yeah, they are. There you can see it's about half developed, it's so green, these little pistachios 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 planting 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. So there are they pretty profitable pistachios, extremely profitable today.


I mean, wildly profitable, really? Yes, actually.


Ten times more profitable than most other crops for pistachios. Market can make 10000 dollars an acre for most other crops, a thousand dollars 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. 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 price has naturally shot up.


So everyone is planting them. And when you drive through California's 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 they've become so profitable.


You hear these stories about hedge funds and big banks buying California farmland and planting almond and pistachio trees because hedge funds and banks have plenty of cash up front to drill these really deep wells, tap the aquifer, get the water first, and the payoff for them could be huge.


And this is being reinforced by the market right now because crops that do well in droughts, they do not bring in that much money.


And if you're running a farm and spending hundreds of thousands of dollars to drill new wells, you are not going to make that money back planting drought friendly crops. I ran this by Mark Waddi Stachel Farmer.


I mean, should you be planning something like flax seed or safflower here instead of pistachio trees?


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


Economists have a term for this race, for a scarce resource, this dilemma. And you've probably heard it even if you haven't taken an economics class. It's called the tragedy of the Commons.


If you have a shared resource, say, a meadow where your cows graze or an underground lake, people will use as much of it as they can.


They will use a public resource until it's gone.


And the reason that they call this a tragedy is not that there are any bad guys in the scenario. It's that 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 Mark the pistachio farmer. If he 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 10000 dollars an acre and he would be stuck with a bunch of safflower.


That's not worth very much.


Yeah. So Mark keeps drilling deeper and his neighbors look at that and they drill deeper to end this race. This race we're talking about becomes frantic.


And to stay in this race, you've got to pick up the phone and call somebody like Steve Arthur. So do you mind reading the back of your truck? Yeah, just says Arthur and well, drilling Fresno, we leave you it.


That's amazing. That's amazing. Is always what I say when I don't know what to say. I can understand that Steve Arthur runs one of the biggest drilling companies in the area and he actually mostly works out of this truck. He drives it from drill 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.


So how long is a wait to get a well drilled? 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 deep. 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.


Years ago, nobody had equipment in the area to go that deep and modern technologies taking care of that now. So we started drilling deeper up there and that's what we found, aquifers nobody had ever touched. And you know how this ends. 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 talk to the water scientists, 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 100 years.


And when I asked him what would happen when the water ran out, what that would look like, he actually referenced the movie Mad Max, as in people driving around the desert fighting each other for Water Thunderdome.


Yeah, because that is one of the logical ways that this ends. The water goes away, the wells go dry, and all of a sudden no one goes pistachios anymore.


No one grows anything anymore. We're talking about functionally a dust bowl happening in the Central Valley.


Another ending could be regulation. The government steps in and says, hey, you have to limit your water use. You can only drill this deep. But so far, the state has been reluctant to do that.


There is one other option, though, one solution to the tragedy, the comments. In fact, there's an economist named Elinor Ostrom. We've talked about her here before on 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 sometimes 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 interests, 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 interests 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 Macquarie's Wadis Pistachio Farm in a town near Sacramento.


Hi, my name is George Hartmann. I'm an attorney, a lawyer in Texas. They call us liars.


George has been working with farmers in this area his whole career. And when you looked around, he saw the same thing was happening there as was 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 in Stockton, California. And he said, listen, I have a proposal. Why don't we voluntarily cut our water use by 25 percent?


And if we do that, the government has said it will not come in later and cut our water.


This. You get certainty, you know what you can do. You can plan your survival, which must have been hard for the farmers there, because in this community, water is money. Water means crops. Crops mean money.


And he's basically coming in and saying to them, I want you to take a 25 percent pay cut. And a lot of the farmers really didn't want to do that.


There were a lot of folks who thought it was extortion. They didn't like it.


But in the end, half of the farmers signed up to do this and Paula Dessner was one of them.


It's costly. It's not ideal because this is your livelihood.


Paula owns a dairy farm in Lodi, California, and she grows a lot of corn for her cows or her girls, as she calls them.


Using 25 percent less water will mean Paula 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 Paul 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.


And you want to do with your part, but you want to make 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. So the government does not make you cut back on your water, then you've just given up your profits for nothing like 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 Waddi, 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 if everybody got together and agreed to use less?


You mean as far as don't pump as much or something like that? Yeah, no, I don't. I don't see that. I just that. No, I don't see that.


How come. I don't know I just a group of No one. You could, you couldn't get consensus if you had only five farmers. I don't think you could get consensus if you've got 500 farmers. I know you couldn't get consensus, so I just don't think it would be a practical thing to try. I mean, right now, you know, you just there's always water down there and you've got haves and have nots. And the haves, I don't think will be in a mood to share with the have nots.


So, yeah, uh, Mark drove me to one of his wells that is just about to go dry. Oh, this is a pump that has was put into service in nineteen forty six, it has faithfully produced water and I expect a week from now it will not be functioning anymore. It will be dry. So it's just another one that 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 years 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 than the rain is putting back in. When we return, we'll bring in the summer school economists to talk about the best ways to make sure the Californians are actually sharing the water.


And they'll show us how the economics of externalities just might save the world. This message comes from NPR sponsor TD Ameritrade meet their newest trading platform, THINKORSWIM Web. It has all the essential tools and strategies in a streamlined interface, no download necessary with a TD Ameritrade dotcom slash thinkorswim web. We're only months away from Election Day and every week or even every few hours, there's a new twist that could affect who will win the White House. To keep up with the latest, tune into the NPR Politics podcast every day to find out what happened and what it means for the election.


Back with us are economists in residence this summer, Betsey Stevenson and Justin Wolfers from the University of Michigan.


And and Betsey, you use this episode in one of your classes and one of your microeconomics classes.


I do is a great episode because I want to get students to think about the kind of problems that we face when we're all trying to share a common resource. This problem comes from a specific kind of class of 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 it's what economists call non excludable.


So maybe we should just go through the different kinds of solutions as economists think of them. 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 less, 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 grew more 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 happen. And the question is the who and the how. The most obvious answers, I think, do involve the government. But there's a different form of government, which is and we talked about it in the episode, they could form, in a sense, their own government, a local association that gets the local pistachio growers together and says, let's use this valuable resource a little more carefully and a little more cleverly.


But what's motivating the coordination is the threat of government regulation if they don't agree to coordinate. So they know that if they can't agree, then they're going to be bound by some other regulation. So it it it does come down to there 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, 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 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 smaller number of them, if they have aligned interests. And also, if I can watch what you're doing and I can see that you're abiding by the agreement, you see that I'm 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 issues, I think, of today's episode as a metaphor for the global warming debate. They're the people who are being harmed by pollution and not just seven people in a local area and not just eight billion people on planet Earth, but today's generation and future generations. And how you get all those people in a room to cooperate, including the unborn, is obviously impossible.


So what can you do here either for California's water problem or for global warming? I know this has been a huge focus of economics over the last decade or so.


So when economists look at things, they see two options. First, those prices and then there's quantities.


So let's take prices. The problem in California is the price of water is free. So when something is free, the pistachio farmers are just going to use it out the wazoo. They're going over consume.


Yeah, it's just a matter of how deep they can go and what the technology is rather than thinking about, oh, 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 want them to do a little less, what we do is make it make him pay for it. So raise the price of water. They're going to use less of it in the global warming context. The same idea is we should impose a carbon tax, making it expensive to pollute. When you make something expensive, people do less of it.


So the second 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 in place that limited how much you could pull out was going to be a function of how much rain had put in so that you'd preserve the water source so you can limit the quantity. We also and the global warming context, we've seen a lot of countries propose capping the amount of pollution that can be emitted by factories.


Now, the problems with these quantity regulations is there can be some real distributional issues.


What do you mean by distributional issues? So if we're 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. Walter, the grandmother who has the twins in her home, can have, but even if we're going to limit the quantity of water that's used, we still want the water to go to the person who's going to use it most efficiently, most effectively, who values it the most.


And so if we say that this is the maximum amount of water we want pulled out of the ground, that's the cap. 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. So you put those two words together, the bits you just said, cap the quantity and allow people to trade.


And you get cap and trade, which is what people have proposed to deal with global warming.


So you hear that often talked about in the pollution context, why cap and trade? Well, some factories can reduce pollution a lot more efficiently than other factories can. Some countries 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.


I take a lot of young people and a lot of young people feel overwhelmed by the problem of global warming, but feel it's too big and too difficult. And I think learning the economics about it turns that on its head. We economists understand what what causes global warming. It's people taking actions without 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. Do you have an assignment for us today, Professors?


I want our listeners to talk as they go through their day trying to identify a common resource that they say in their lives and either ask themselves whether it's being overconsumed or alternatively what it is that's preventing people from over consuming it.


Thank you both very much. See you next week.


I'm so excited what 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 what you came up with from our assignment this week.


Analyze a common resource you share with your neighbors and send it to Planet Money at Unpeg. Or you can find us on Facebook, Instagram, Twitter and Tic-Tac. We're at Planet Money, by the way. You've all been doing a great job with your assignments. I just haven't graded them all yet. It's hard being a teacher.


Today's class was produced by Lauren Hodges with help from Darian Woods and Alexi Horowitz, Gazy 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 five next week when we will tax Santa Claus.


I'm Robert Smith. This is NPR.


Thanks for listening.