Water pricing in different sectors

My previous post linked to a new alarming/alarmist (potato, potahto) study of South Africa’s water pollution problems. I mentioned some economic elements that I feel need addressing if we’re ever going to provide the right set of incentives to ensure sustainable water use.

What I completely glossed over didn’t really discuss was the fact that water has a multitude of different uses, which can make valuation very hard. With regards to pricing structures, can you apply the same set of rules to all different users (residential vs agricultural vs industrial)? I can see more than a few practical problems, but there are certainly those who believe that we can and should do so. Prolific water blogger – and recent addition to the job market! – David Zetland has long advocated a system of “all-in auctions”. In other words, very low prices for water aimed at meeting basic human needs, after which all comers are subject to compete against each other on price bids.*

Having been raised in agricultural country, I can think of of a number of farmers that aren't going to be too happy with this type of proposal. However, that's a practical obstacle that can be overcome - largely through greater dialogue and explanation of the actual procedures. Further to the point, a large number of farmers already control their own water sources in the form of small dams and so forth; you've obviously no need to submit to an auction if you already own the resource. In a similar vein, in instances where a bunch of farms are located along a river, the bidding could first be among that group of farmers. In cases where rivers flow to cities or industrial areas, up stream farmers could potentially make money by auctioning off "usage rights" to urban and industrial consumers.

On the subject of water usage by different consumers and sectors, I posted some relevant comments a while ago on a blog run by some Austrian friends (ideologically speaking that is, not geographically). With minor edits for style and following a discussion on the urgent need for a hike in (residential) water prices in SA:

One of the better articles on environmental issues published on this site. (Some of your climate and pollution arguments have been rather lacking in my opinion…)

[Editor’s note: For instance http://www.humanaction.co.za/2010/03/propaganda-a-greater-pollutant-than-co2/] 

Anyway, I certainly agree that water will be a defining issue for South Africa long before other crises and our current pricing structure is woefully inadequate. (As with many countries, the focus is on recuperating short-run average/operating costs instead of the economically sensible long-run marginal costs. While SRAC could be considered as constant, LRMC are typically increasing over time, so prices lie below their optimal value…)

However, the article does skirt around perhaps the most tricky issue with regards to water: There are MANY different uses for water and thus many different marginal values. Residential water consumption is fairly minute in comparison to agriculture and, to a lesser degree, industry. Thus – and although it may not agree with your definition of inflation (i.e. an expansion of money supply) – correct marginal pricing of water will certainly bring about an increase in general prices. Why? Water is a crucial factor of production for virtually everything we consume. Thus, an increase in price will carry through to all final products.

Not easy for society, but that is simply the bitter pill we need to swallow in order to establish sustainable use of what is perhaps our most valuable commodity.

After a fairly odd reply regarding my understanding of inflation**, I ended an additional comment with:

[A]n increase in water prices will have much further implications than simply raised costs of showering or watering our gardens; it will affect prices for an entire host of economic goods.

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* If you aren’t aware of it, I recommend David’s blog aguanomics.com to anyone interested in water and water economics.

** Like all proud Austrians, they love to focus on inflation as a definitional good...

"South Africa facing water pollution crisis"

Supplies, supplies.

(See what I did there?)

So back home, more and more people are cottoning on to the fact that the local water situation ain't looking too hot:

The Environment and Conservation Association said in a statement on Tuesday that it was estimated that in five years, almost 80% of the country's fresh water resources would be so badly polluted that no process of purification available in the country would be able to clean it sufficiently to make it fit for human or animal consumption.

[snip]

The impending disaster that would be created by acid mine drainage as well as sewerage and industrial pollution had on many occasions been brought to the attention of the government, with no positive results however, the association said.

[snip].

"We will need approximately R1m for [an extensive water monitoring project aimed at fully ascertaining the status of the country's freshwater reserves]. It is time that big businesses, especially those that rely on water for the production of their products like Coca Cola, SAB Miller, Windhoek Beer, all soft drink manufacturers and food producers, get involved and make a substantial contribution towards organisations like ours so we can save South Africa's water."

While I certainly appreciate efforts to create more awareness of SA's freshwater problem, the general stance as regards treatment still leaves much to be desired. I don't know much about The Environment and Conservation Association, but from their website it seems a pretty small outfit with no formal economics influence. (I'm also just a little dubious about the severity of their claim - 80% by 2015?? - but I'll leave those details aside for the moment.) Some brief thoughts:

1) Marginal Cost ≠ 0?, Marginal Benefit ≠ 0?

How about coming around to the fact that ascribing zero value to a resource inevitably leads to people treating it such (i.e. worthless)? We need to start charging water rates commensurate to the (marginal) costs of providing it. Before anyone complains that "water is a human right!"; yes, I agree.[*] That's why I want to make sure we manage it properly. There a number of available pricing structures to achieve this, while still protecting the poor and ensuring that everyone has access to some basic, "human rights" level of water. Two of my preferred candidates: (increasing) block-rate pricing and two-part tariffs (a la cellphones).

2) Property rights anyone?

If mines and industry are polluting your water, then call up your lawyer. Or, if you are worried about the protracted inefficiencies of the legal/tort system, you can try to minimise transaction costs by pressuring government into regulation. Okay, it's hardly that simple in the real world - the article makes this very clear - but don't shoot the messenger. I'm trying to make the point that there is more than one option available to prevent corporations from enjoying a free lunch at our expense. I also don't think that the public vs privatisation argument should be a barrier to agreeing about basic property rights in this context... I'm less concerned with who owns a water source, than the fact that they (Govt, business, whoever) are within their rights to prevent an external party from ruining it for the purpose for which it was intended.

3) I'm glad that the ECA is looking to get some of the big beverage companies on board in its campaign. However, you don't need to appeal to their sense of civic duty if you manage to get the first two points right (pricing and property rights). In other words, you're better off appealing to their own self interest. The same goes for residential consumers. Individuals aren't going to conserve water until it starts hurting their pocket, or runs them into trouble with the law.

THOUGHT FOR THE DAY: South Africa has vulnerable freshwater supplies that require careful management. Public awareness is the first step, but it's ultimately economic incentives that will ensure the sustainable use of the country's water resources. I'm happy to see steps in the right direction, but big problems require big actions. Until I stop seeing studies and articles like this, I'm going to remain of the opinion that there's a lot more that can and needs to be done.

[UPDATE: Apparently officials aren't particularly impressed by the report. I've seen this movie before... Although, in fairness, I've already mentioned my scepticism over the extent of the ECA's claims.]

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[*]Agree... up until a point, that is. As Peter Braebeck puts it: 

"I think that [the question of water as a human right] is a very, very crucial question and it is being brought forward by some NGOs in a very simplistic manner. They are saying water is a human right; therefore, it's not a commercial material.

My answer to this is, yes, you're right. Water is a human right.

The 25 liters of water that we need as a minimum, as a person, in order to live decently[...]. Yes, this is a human right. But I don't think it's a human right to fill up my swimming pool, to wash my cars, to water the golf course, or even to water the garden."

Has the last decade produced a better band than Arcade Fire?

No immediate candidates spring to mind.

SUBURBAN WAR

Let’s go for a drive and see the town tonight

There’s nothing to do but I don’t mind when I’m with you

This town’s so strange they built it to change

And while we sleep we know the streets get rearranged

With my old friends it was so different then

Before your war against the suburbs began

Before it began

Now the music divides us into tribes

You grew your hair so I grew mine

You said the past won’t rest

Until we jump the fence and leave it behind

With my old friends I can remember when

You cut your hair, I never saw you again

Now the cities we live in could be distant stars

And I search for you in every passing car

The night’s so long

Yeah the night’s so long

I’ve been living in the shadows of your song

Been living in the shadows of your song

In the suburbs I, I learned to drive

And you told me we would never survive,

So grab your mother’s keys we leave tonight

But you started a war that we can’t win

They keep erasing all the streets we grew up in

Now the music divides us into tribes

You choose your side, I’ll choose my side

All my old friends they don’t know me now

All my old friends are staring through me now

All my old friends they don’t know me now

All my old friends they don’t know me now

They don’t know me now

All my old friends, wait…

And just in case anyone hasn't seen it:
http://thewildernessdowntown.com/
Do it. Do it now.
(Needs Google Chrome...)

Quote of the day - Experts

An expert is one who knows more and more about less and less.

- Nicholas Butler

Take THAT Adam Smith!

Mild sarcasm font over, there are obviously productivity gains to be had from specialisation and the division of labour. (Busy reading David Landes' "The Wealth and Poverty of Nations" at the moment... and this is certainly a recurring theme.) Still, you start running into diminishing marginal returns if your population is entirely composed of - as an old university professor of mine memorably put it - "idiot savants".

Bringing a priori bias back to the level of the mundane

[UPDATE: The situation has been (partially) resolved. Not so much an apology, but at least acknowledgement that I am probably not a backpacking Sheila on a pre-Uni world jaunt "with my girlies". How did I manage this? The way any self-respecting man would: By getting his GF to email and sort things out. (She insisted.)]

A strange thing happened to me today:

I was minding my own business searching the internet for mail-order brides crushed rhino horn very intellectual school stuff, when up popped an email from a B&B that I stayed at during a recent Croatia trip with my girlfriend.

I scanned the first few lines and “realised” what the problem was: Having completed our Croatia holiday, I was requested to review all our various accommodations on Hostel World (the site I originally used to make our bookings). However, due to some computer glitch, the same review ended up getting posted twice for two different places; one in Split, the other in Hvar. As we had enjoyed the latter (i.e. the B&B in question) more than the former, I had tried to edit this double post only to encounter difficulties in doing do so. I eventually left it thinking that readers and the Hostel World team would notice something was amiss; if for no other reason that I referred to a different city in my actual review (Hvar vs Split)!

So, instead of reading through the whole email, I skipped straight to the reply button with an “Oh, yes, sorry about the misunderstanding. This is what happened, can you help us fix it? Blah Blah Blah Kind Regards...” response. This is the reply I got:

“Stop playing , my mail gave you an answer already.Next time don´t close doors for yourself by lies.Your writings on trip advisor gave me a sight in your personality. 

I HAVE NOTHING MORE TO SAY ABOUT THIS.”

Note to self: WTF?

I decided that a second reading of the initial email was warranted and, in keeping with the El Duderino theme* of stickman’s corral, my response upon doing so was: “What in God’s Holy Name are you blathering about??”

A word from our sponsors...

[Warning: One or two f-bombs in the above clip.]

I have many uninformed opinions and, possibly, some reasonably enlightened ones. If anyone makes it over to this blog -- and that's assuming I ever manage to get some posts going with any kind of regularity -- I promise to try and adhere to the principles espoused by his Dudeness above.

Now, I'll obviously aim to post on things that I feel I can make useful comments about and, more often than not, that will involve a pretty established opinion. But, I'm open to being wrong and I'd enjoy some form of dialectic discourse (in the classic sense, that is).

Unless there are morons involved.

In which case I will be forced to laugh.

In your face.