A libertarian thought on water restrictions

Water restrictions have been bugging me a bit lately. Beyond what I wrote a couple of years ago (drop the restrictions, raise the price), I haven’t got anything new to say. But it did occur to me today that restrictions on water use would probably be impermissible if we tried them with any other commodity. I haven’t checked the statute, but I have a vague recollection from law school, that sellers of goods can’t require buyers to use them only in particular ways. For example, I’m pretty sure it’d breach the law if sellers of milk tried to punish buyers who gave it to their cat rather than putting it in their coffee. But somehow society seems to think it’s ok to do such a thing with water.

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26 Responses to A libertarian thought on water restrictions

  1. Patrick says:

    Not the part of society constituted by me! Not by a long shot I don’t.

    Especially when urban water restrictions are a farce in any case, compounded by the apparent lack of any desire of any state government besides WA to actually make any positive step to increase the water supply.

  2. You are right Andrew. It is the old: watering the gardening vs the 30 min shower issue…we all use water differently, some more wasteful than others.

    So, what if we got to a stage where there was limited water, how would you feel about rations? Everyone gets there 150L per person per day and we can use it how we see fit. I’m living on 4A restrictions in an area where rain is still looking unlikely and the dam people get water from is below 15%.

    That said, I found the solution was to move to a property without mains water – dig my own dam, set up a couple of tanks and I can use the water we have however we like.

  3. Sinclair Davidson says:

    that sellers of goods can’t require buyers to use them only in particular ways

    You’re probably right, in general, but I’m wondering about games consoles, restrictions on re-selling on music and movies, property covenants, and the like. So there must be come category of rights you can restrict.

  4. Seneca says:

    Delighted to read this – I have wondered the same thing and also wondered why nobody had said it! I noticed a similar element creeping into some comments on electricity usage, although still “voluntary restraint”.

    I guess the governments are benefiting from some implicit belief that water use is somehow beyond commerce, an essential commodity that has to be managed by the State.

  5. Patrick says:

    Most of the restrictions you are talking about are covered by copyright law – itself more contentious than water restrictions.

    But the restrictions on games consoles are largely bluffs, as are a good part of the copyright.

  6. Kevin Cox says:

    We have a proposal in with the Water Commission to fund a system called Water Rewards. The system is designed to overcome the emotional issues related to price of water. The main issue is what can thought of as the emotional issue that people see access to water as a right and get “upset” if some people have more because they can pay more.

    We have designed our system so that everyone gets an allocation based on the head count “attached” to meter and the cost of that allocation is affordable by all. If you consume more than your allocation then you pay more. The extra money that people pay for the water is given to those who consume less.

    There are a couple of further twists. The first is that Water Rewards can only be spent on ways to make better use of the water we have. The second is that the scheme is voluntary but if you join you get Rewards if you consume little and you are not subjected to restrictions if you consume more. The third is that we increase rewards by putting some of the abstraction charges into Rewards. The fourth is that system is structured as a not for profit and will be owned by the members. This is done because people seem to feel that profits should not be made from essential services.

    Because there are constraints on how you spend Rewards you can sell your Rewards to others but they still must use them on Water.

    Our proposal has been with the Water Commission for 7 months, we have two water authorities (the only two we have approached) to give it a try.

    The organisations proposing the system (Edentiti, EWater CRC, and Easy being Green) will earn money from providing services to Water Rewards.

    Would very much like to hear objections or ways to improve the system.

  7. Thinking in old ways says:

    I am wondering whether or not the question you raise is related to the conditionality of use as part of the purchase of the product – or whether the restrictions on use is an external regulation not associated with the actual purchase of the product.

    The fact that the same government agencies may be associated with supply and regulation may confuse this picture.

    Seen in such a way one might differentiate between fines for watering your lawn outside of approved hours (a user charge on a non approved preference for water use ?) and the Victorian approach of cutting your water supply to a dribble.

    There are many goods that you can purchase but have restraints on their use. Consider tobacco – you can buy it – but there are restraints on where you can consume it.

  8. rossco says:

    Restrictions on the use of water after you have purchased it are nothing compared to the restrictions on use of a car after purchase.

  9. Thinking in old ways says:

    rossco

    I disagree – think of the speed limits that were introduced at the time of the ‘oil crisis’ of the 1970s – they were exactly the same thing: a regulation imposed to limit the way in which a commodity was consumed with the goal of limiting total consumption.

  10. Claire says:

    Aren’t pharmaceuticals restricted to their advertised use only? There was an issue in the US recently with a stomach ulcer treatment (I think it was) being prescribed in cancer cases.

  11. Andrew Leigh says:

    Kevin, my first reaction to your scheme is that it sounds better than the status quo.

    My second reaction is that it’s way more complex than it needs to be. Why not just set price=marginal cost, and make a lump sum transfer to the poor (or to everyone, if you prefer)?

  12. derrida derider says:

    While I agree that water restrictions are about the most illiberal and inefficient way to manage this (straight rationing would be better, and price mechanisms better still), the problem is that marginal cost varies wildly from year to year.

    So I’d handle it by a swingeing “drought levy” during dry years rather than by a permanent price rise. You could even set the rate by a legislated formula (depending eg on reservoir capacity) to get the pollies off the hook a bit.

    Note that a tax on water should be progressive – it’s not the poor who have swimming pools, extensive gardens and spa ensuites. So distributing the lump sum equally would mean the policy would be progressive in toto. But then it would probably be better politics to hypothecate the windfall revenue for future water supply as support for that will be higher in drought years.

  13. Kevin Cox says:

    Thanks Andrew. I have been trying to get someone to tell me what might be wrong and you have pointed out one of the reasons.

    Here are the reasons why we have made it more complex than at first sight it appears to need.

    One of the central ideas is that we need to get people to change their habits and invest in water saving devices inside the home. Rewards we believe will help do this. I have observed with amazement the effect of relatively minor rewards on consumer behaviour – completely out of all proportion to the value. There is a reason for all those free gifts. The success of the 4 cents a litre off on petrol is another example. Also rewards can be made visible and you can imagine competitions for schools etc.

    The second reason is that to make significant changes in water use will require some form of investment. For example we may wish to change to drip watering or to a waterless urinal. Both will take money but we have much better uses for our money because the cost of water is so low that it does not make economic sense for a person to invest. By requiring Rewards be spent on water savings that they cannot use in any other way (except can sell it at a discount). The price of rain water is so low that most water savings infrastructure cannot be justified unless the price of water reaches the cost of recycled water or unless we distort the market. We think the distortion of requiring Water Rewards to be spent on Water Savings things is a minor distortion compared to other approaches.

    The third reason is that if we simply increase the price of water then the extra funds go to the government of the day. Some governments (I won’t mention which ones) collect 100 cents but only spend 50 cents on supplying the water, servicing the debt and looking after future supplies. If we can get hold of some of the missing 50 cents then we will be able to ensure it goes on water sustainability not on superannuation for public servants.

    The fourth reason is that we believe that having a lot of buyers with water rewards will give a more efficient use of the money then leaving the money with the government or with the Water Authority and getting them to decide on how to spend it because in effect you do not have a market as they will spend it on things that they will end up owning.

    Another long term reason is that the system works just as well with rural water. There is no reason why Water Rewards can’t be used anywhere that joins the system. This would then permit Sydney Water Rewards to be spent in Murrumbidgee basin and so make a nation wide bigger market for Water Rewards (which in a sense is “new water”). You cannot have a single market for old water because of geographic catchments.

    Finally it is going to be relatively easy to implement because it will be a voluntary system where people will join for the rewards or to be free of water restrictions and because it is volutary we can get them to do much of the work on maintaining their information etc. Lots of things that might appear to be more complex in practise turn out to relatively easy to implement if the operations are electronic and if you give users more control rather than organisations.

  14. Patrick says:

    That’s an argument for privatisation, ‘free’ pricing and government transfers not for Water Rewards.

  15. Kevin Cox says:

    A problem with water is that there is an enormous cost differential between say water in dams and water in home tanks let alone water from desalination. Finding the “marginal cost of water” is difficult to say the least.

    The stuff is also subject to a lot of legal barriers.

    If you privatise you end up with a private monopoly and the British experience is not good.

    Government transfers are what is happening at the moment with the separation of rural from urban water. The transfers are subject to political whims.

    You have difficulties in that there is not one market for water but markets for each water catchment and each groundwater system and for recycled and “used water” and they all overlap.

    The delivery of urban water is a natural monopoly in that it is silly to have multiple pipes running down the street and water and sewerage fit together. However you have a natural monopoly for the supply of “old water” because there is normally only one or two spots for a decent dam.

    If you examine Water Rewards a bit more what we have done is to create a market for the provision of “new water” which should result in the most efficient use of money for “new water” which is what we need. We do not really need a market for “old water” because it is very efficient in its delivery if it rains.

    I think this is at the heart of the economic problem with Water. That is, you need a market for “new water” but “new water” is inextricably bound up with old water and difficult if not impossible to separate them. Making a different market for funds for the provision of “new water” should result in the efficient allocation of funds for “new water” which is the objective of the exercise.

  16. Kevin Cox says:

    In the long term Water Rewards will result in the private ownership of new infrastructure so it will achieve privatisation if that is thought to be a necessary condition for the efficient allocation of money.

    My understanding of markets is that they are useful to get the best allocation of funds to serve a particular need. To have a market I suggest you need buyers with funds to buy something and you need suppliers who can supply it to them and the buyers are free to choose and both buyers and suppliers do not collude.

    Think about Water Rewards and you will see that we have created a lot of buyers who can choose to spend their money on the best thing for them in terms of infrastructure to increase the usable supply of water.

  17. Andrew Leigh says:

    Kevin, finding the marginal cost of water really isn’t that hard. The other day, a senior water-setting bureaucrat from one of the Australian states told me his estimate of the marginal cost of a kilolitre of desalinated water. He didn’t even round it off to the nearest 5c.

  18. Kevin Cox says:

    Each different way of producing “new water” will have a different marginal cost. The best way for me might be to invest in a new washing machine.

    Do you argue that we can pick one of these methods of getting new water which for argument sake is desalinated water and charge everyone that amount for all water?

  19. Andrew Leigh says:

    Yep, that sounds pretty reasonable to me.

  20. Kevin Cox says:

    Rewards amplify the effect of price increases. They use prices but through their distribution and use they accelerate the construction of new infrastructure needed for “new water”.

    Rewards involves an increase in the price of water (on those who consume more) so it involves prices as one mechanism.

    Rewards amplifies the effect of price in two ways. The first is through the people who save water not only getting the benefit of lower cost of water but an extra benefit of the reward and so they are more likely to save water.

    The second is that it provides a mechanism for the distribution of money to householders to purchase infrastructure to save water. A lot of savings require an investment. What we have done by increasing the price of all water is to give profits to the water authority who have difficulty spending it efficiently. You end up with one purchaser of water infrastructure and one supplier of new water which is one and the same and that does not create a very good market. Like all monopoly situations there is no incentive to find the best solution but to get the most money for the least amount of work. While they can get away with it this means spending little or nothing on water infrastructure because they cannot get a good return on “new water” and you solve the problem by limiting the demand through rationing by restrictions not by price.

    To overcome this second problem we need a mechanism to make the price increase for “old water” be given back to consumers so they can decide how to spend the money but we want to make sure that the money is spent on water saving mechanisms. There are many ways of doing this and rewards is one way.

    The net effect of the process is that you allow many sellers of water saving solutions to flourish because they have many potential buyers with money to spend as opposed to the situation with a simple price increase of having one buyer and normally one seller and they are the same.

    By thinking of the problem of one where people are buying infrastructure to create “new water” rather than buying water then Rewards starts to make much more sense.

    We use price to reduce consumption and encourage other ways of creating “new water” but amplify the effect through rewards. The effect will be that we will be able to satisfy our supply problems with a much lower price than just using price alone.

    If this approach of “amplification” of the effect of price increases works then it will work with greenhouse gases. We will be able to get away with a much lower carbon tax than if we relied solely on price to get the change to a different infrastructure.

    Rewards is more complex than a simple price increase because it is doing more. In practice it will be simple for consumers because most people will cash in their rewards to those (probably the water authority) who can get the best value for the use of the funds.

    The measure of its success will be whether it will give us water sustainability at lower prices.

  21. Kevin Cox says:

    I have been thinking about the last sentence in the previous entry. This may be a good way of measuring the effectiveness of the proposal and perhaps bring a warm glow to an economist.

    I am assuming the social objective of a pricing system for any community resource, such as the supply of water, is to meet the overall objective for the community at the least cost. In this case the social objective is to provide a sustainable source of water. The cost is the total cost of supplying the water and is measured by the average cost per litre including subsidies. Sustainable being defined as no water restrictions while not running out of water.

    Given a definition such as this it may be possible to compare the efficiency of water supply systems in different water catchments.

    I’d be very interested in any comments on this measure as it would strengthen our case considerably if we can propose a better objective measure by which to evaluate our proposal. At the moment we are asked to use the notional cost per kiloliter of “new water” because most competing proposals are projects to increase the supply of usable water or to reuse water.

    My “gut” feeling is that it may be about 25% less than achieving sustainability through a simple marginal cost price increase because of the increased efficiencies caused by changes in consumer behaviour, in the more efficient allocation of available funds to water saving infrastructure, and in the reduced financial costs because of the lower early average prices. If we are allowed to include the reduction of costs because water is not used as a general purpose taxing vehicle then the figure may be above 50%

    If my guess is only partially right then think of the implications for the total cost of freeing the world of greenhouse gases let alone the cost of providing sustainable water supplies.

    Looks like a nice topic for a research degree:)

  22. Kevin Cox says:

    DD Water Rewards is socially progressive and lends itself to “tuning” that I think will be socially acceptable. It is based on a per head allocation.

    When it appears that there will be a shortage of water we increase the price of excess water “per head” and we increase the value of the rewards. If our water situation changes so that there is a surfeit of water then we reduce the price of excess water and of rewards.

    Businesses and farmers can be included in the system by increasing the price of all water to them but return the increase as Water Rewards.

    To me the system is very transparent and I think difficult to corrupt. It is our intention that the Water Rewards organisation itself will be a not for profit and controlled by the members and not by the government or any private company.

  23. Kevin Cox says:

    Andrew the cost of desalinated water appears to be about $1A per kiloliter.
    http://www.lenntech.com/specific-questions-water-quantities.htm

    According to the Canberra Times the average household usage in Canberra is 260kiloliters or $260. However the current charges for 260 kiloliters for Canberra Water is $434 (55 cents abstraction charge, 70 kl at .66 and 190 at $1.24).

    That is the average price Canberrans pay for water is much greater than the cost of desalinated water? We would expect that the cost of “new water” for Canberra should be about the same cost as desalinated water.

    Putting up the price to the marginal cost of water has not given Canberra a sustainable supply of water.

    Could it be that we have a monopoly supplier and no real market for the supply of water? Could it be that most of the money collected does not go towards increasing supply?

  24. derrida derider says:

    See, the other problem here is that term “marginal”. In the very long run, all costs are marginal in the sense that the depreciated value of assets – ie sunk costs – are negligible. I thinks it’s quite in order to charge average cost for these things – which must include interest on the debt from dams.

    But of course it is also an argument for strict hypothecation of the water levy. The penchant for treating utility reserves as “hollow logs”, begun deliberately by Nifty Neville Wran for short term political advantage and rapidly adopted by all State treasurers, has had dreadful long run effects.

  25. Kevin Cox says:

    dd hypothecation has a lot to answer for and is used as the excuse for gross misallocations in other areas as well. In Canberra we have it at some of its worst excesses in income from land sales. We have a growing “disaster” in terms of provision of community resources in the Gungahlin area caused by this approach. Hundreds of millions of dollars in excess charges from new land sales are being taken out of Gungahlin with very little being spent on capital infrastructure of such basic community facilities as land for buildings for workplaces, areas for sporting facilities, areas for some types of retail stores (petrol stations for example), and generally a lack of open space for community recreation.

    However, this is only part of the problem. It is my belief that a more pervasive and inefficient effect is the complete lack of markets (whereby I mean many people choosing a service or goods from a variety of suppliers) in the spending of taxes. This is not as visible and is more difficult to quantify but I suspect it is major drag on our economy as more and more funds are spent by governments and large monopoly corporations rather than by people who are supposed to receive the benefits of the expenditure.

    If we get Water Rewards off the ground it is this idea that I believe will be its biggest impact.

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