Links, Economics

Pricing Water

Many of this blog’s readers are familiar with Econtalk, and I want to recommend a terrific recent episode on the importance of not underpricing water with economist David Zetland. It is an extremely common practice to price water below—sometimes way below—its market price, which means, of course, that demand outstrips the supply. The consequences of this in affluent countries such as the US include environmental damage—e.g., in some parts of California aquifers are being drained in an unsustainable way, rivers are drained, and entire lakes are drained—and encouragement of sprawl, since new communities tend not to pay the cost of their additional demand. (Some people prefer ‘sprawl’, of course, but what is at issue is whether that preference would change if new communities had to pay the cost of their additional water demand.)

What I found most eye-opening was the consequences in undeveloped countries, where the subsidization of water is more pronounced. Here’s a quote from the transcript: “[A] typical situation in India for example is that the price of water is set very low. And so there’s no revenue to the utility. They are only going to provide water to the core of the urban area, not to the periphery or to the slums. And then they only provide it a certain number of hours per day. That’s kind of a typical scenario for a developing country. What happens then is that people are going to have those tanks [cisterns to store water when the tap is off]; they are going to have suction pumps that they drop into the mains that will try and suck out as much water as is there when it’s around. This tends to create negative pressure, which sucks in sewage from all the cracks in the mains, which are next to the sewage lines if you have sewage. So they have contamination; they’ve got all kinds of problems of supply. And that is, as far as I’m concerned, directly related to the government putting a price limit on water, because they think it’s the proper way to help poor people.”

Price controls often hurt the very people they are supposed to help. One thing I learned from the Zetland podcast is that price controls on water may be one of the most pernicious forms of price controls, particularly in undeveloped countries. Or to put the point more positively, proper pricing of water is a reform that would be of enormous benefit to many of the most vulnerable people on the planet.

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After listening to the podcast, I plan to buy Zetland’s book, Living With Water Scarcity. Russ Roberts gives a lovely quote from the book defending pricing of water to cover all of its costs: “Prices generate revenues and reduce demand, but they also give customers choices. A regulation on outdoor watering may annoy a granny with flowers. A desalination plant may annoy environmentalists. An education campaign is condescending to some and a waste of breath on others. A campaign to install low-flow toilets may install sparkling receptacles in unused second bathrooms. Prices send a direct signal at the same time as they accommodate many responses. Customers can choose their own mix of technologies and techniques. Some will take shorter showers. Others will install drip irrigation. Some will shower at work. Others will just pay more. A higher price for water, like a higher price for any commodity, allows people to choose how much water to use. Choice is a pleasant option compared to water shortages or tickets from water cops.”

  • ThaomasH

    An even more extreme example is agriculture in Egypt and Pakistan, both with huge populations dependent on essentially on one river, the Nile and the Indus. In both countries huge amounts are water go to producing sugar cane, one of the most water intensive crops in all of agriculture. Pakistani Punjab is also draining its aquifers.

    • Sean II

      If Pakistan needs a less thirsty crop to replace sugar cane, may I suggest palaver somniferum?

      • ThaomasH

        Maybe Afghanistan has a comparative advantage. 🙂

        • Sean II

          Yes, well…I see the single biggest item on the Afghan export chart is “natural gums & resins – 16%”.

          Such a nice way of putting it.

  • Sean II

    See, this is why it’s cool to be a libertarian. Your typical schmuck watches Chinatown and just accepts Noah Cross as the villain.

    Not us, baby.

    • MARK_D_FRIEDMAN

      He was a VERY bad man.

      • Sean II

        I wonder if extreme left-wingers watch that movie and think: “Well, I certainly can’t hate him for the incest. That would make me guilty of “non-sanguinist privilege”! But trying to profit from control of a common treasure/public good/human right like WATER. Simply despicable.”

        • Theresa Klein

          I think the filmmakers were attempting telegraph the fact that he was evil by the fact that he profits from water. So when it turns out he’s raping his daughter, you’re not terribly shocked.

          • Sean II

            I think you’re exactly right, and that in two quick sentences you’ve explained why Chinatown is one of the most
            overrated efforts, not just of the New Hollywood period, but in all of film history.

  • Red Baker

    Proper pricing means a proper system, a safe and sustainable one, which does not lead to dysentery. Under-pricing is just vote-buying and a misuse of a vital service.

  • stevenjohnson2

    Allowing private water utilities to set their prices does not appear to be helping the poor people in areas with mass poverty and low economic development such as Africa. Further in general, it is not at all clear even in principle how high prices for water are supposed to be good for poor people. Nor is it clear why public water supply can’t accomplish the subsidization of poor people’s water consumption more effectively than simple price controls. Structuring water fees by district are another possibility, although that would be a disguised example of the dreaded redistribuitive taxation.

    Is the purpose of the water business to make money for the owners, or to provide water for people?

    • Discuss

      In my “humble” opinion, water is a life necessity and who are we to try to make money off it from fellow nationalists like ourselves. Water should be a free resource that’s available to all on an equal basis.

      What do You think?

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