More on the Water Thing

OK, so I got a bit upset about Victoria's permanent water restrictions....

But a piece by Andrew Leigh (Imagining Australia) in the SMH last week got me thinking about the whole manage supply or demand thing when it comes to water:

There is only one reason for such restrictions: the price of water is too low. Plenty of other goods in society are both important and scarce.

Almost every household consumes bread, milk and electricity daily, but without government restrictions on when and how they can be used. The trick with bread, milk and electricity is that the people who supply them charge a price that reflects the cost of production.

Presumably because it fears political backlash, governments prefer to set a price for water that is too low, and then employs a plethora of regulations to keep consumption down.

A better approach would be to raise the price of water, and let individuals choose precisely how they want to save on consumption.

Now that makes sense.  And so simple, so obvious.

Think about it.  If they manage to set the right price for water, it  will force us- consumers- to decide how best to conserve water, let us decide us when we want to use water as well as how we choose to use it, and as Andrew points out, it could also create incentives for suppliers to find new ways of increasing the amount of water available.

In the long run, it just might be the best way to manage Australia's scarce water resources, particularly since there is no rush to develop new supply solutions.

Comments

[Tony Goodson]

Isn't the point about water that, 70% of it is consumed by agriculture, 20% by industry, and 10% by home consumption, so even if we improved our home conservation by 10%, we'd be improving our overall consumption by 1%.

So why are we pissing around feeling guilty about our water consumption when it's just a drop in the ocean!!

[optimus]

it's interesting that at least two of your 'free market' goods (milk and electricity) whose prices are the result of marketing boards, regulators, crown companies and a host of other dynamics not found in perfectly competitive markets.

but that quibble aside, the reason that water is underpriced relative to demand is that the goal is to ensure complete, unhindered access to water at a minimum level (enough to meet basic human needs) while controlling discretionary use/waste. it's not an easy pricing trick (making price variable at different usage thresholds?) and not one that the market alone is able to manage as neatly as described above.