The visible hand in economics

Metering and the market for water

Posted on: November 28, 2008

The DomPost contained an article on the potential for metering Wellington’s water supply. The question is asked: should Wellingtonians pay for their water? This issue is a hot topic, having been discussed at Kiwiblog, Infometrics and TVHE earlier this year.

Historically, water has been provided for by the various Wellington councils out of rates. Water is not currently metered, which implies that regardless of how much water each household takes, their rates do not vary. This arrangement has led many to believe water is in some way ‘free’, as they are not forced to pay for their specific usage and the cost is embodied in rates which cover many council services across many households. With water use of 400 litres per person per day in Wellington, relative to the national average of 160 litres, it appears water users here are not internalising the cost of their water usage.

Current arrangements do not allow for the pricing of scarcity. Water is increasingly becoming a scarce resource in that demand is increasing significantly, through factors such as population growth and drier summers (also affecting supply), while additional supply is particularly costly. i.e. constructing a new $142m dam. “Acute shortages” are likely under the current framework.

Given the increasing scarcity of water, as well as the very costly supply-side response, what demand-side options are there to resolve the problem? Broadly, one can attempt to allocate water through price or quantity. Quantity rationing is the method currently used, as water is not priced, which involves enforced conservation methods (note that voluntary conservation measures have failed).

The more efficient way to tackle the problem is through a price based mechanism. Metering water and forcing those that use the water to pay suggests that consumption could be “slashed” by 20 to 40 per cent. Pricing water appropriately signals to consumers the true cost of their water use and will encourage conservation of water through internalising this cost.

I envisage an eventual water price that ebbs and flows with the state of of the reservoirs, much like in the wholesale electricity market, although this could be the economist in me getting carried away. ;) A much more likely outcome is a simple flat-tariff per unit of water consumed.

The point is also made that simply through providing consumers with information on their usage, via metering, could encourage savings. However, the savings would not be as much as under an appropriately priced system and hence simply providing information on usage through meters should be seen as a second best response to the scarcity problem. However, introducing meters without pricing could be a necessary initial step towards the eventual pricing of water, given political sensitivities around the issue.

6 Responses to "Metering and the market for water"

Sounds like a fixed feed that doesn’t vary with usage isn’t working. I agree that just telling poeple what their consumption is isn’t going to the trick. The greenies will adjust because it will make them feel good about themselves as will some other people.

However, alot of people just won’t care unless there is a direct cost associated with its use. Bring on a price for water I say!

Do you know much about how water is metered/priced in Auckland agnitio? I read somewhere (albeit a blog comment elsewhere) that it is to some extent privatised.

No idea, I live in an apartment building so all that stuff gets taken care of in the background:)

Interesting take here

http://greenvoices.wordpress.com/2008/11/27/counting-the-drips/

Aparantly there is some evidnence the the demand for water is quite price inelastic, not surprising really when you think about it:)

As an Auckland homeowner and ratepayer, we get a quarterly (i think?) bill for our water useage from Metrowater. I assume it is a fixed price per unit rather than a floating price. Certainly makes me think about our water useage, but then I have a economics degree and therefore not a typical consumer..

well it depends how you look at the water market. the market can be constructed in a different way, whereby consumers purchase the “service” of Access to purified water.

OR

If it is a product of quantity of purified water.

The first relies on an infinite ammount of unpurified water, and as the demand for water increases there has to be more and more expensive plants to provide the service – eventually desalinisation plants. Everyone pays the same because each buys the same service, even if some use a greater quantity. What opponents to metering don’t realise is that under this model, society will end up paying more for each litre of water, and consuming more water… furthermore, some will not be able to afford the access to water and will miss out. under the market for a quantity of water, everyone gets water, but those who cannot afford it must ration their use.

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