Trickle-down economics
Economists tend to view water conservation efforts by state and local governments as “feel good” projects that make little economic sense. But if there ever was a sucessful government program, these are it.
According to a report released by the U.S. Geological Survey last week, water use in the U.S has been flat over the last 30 years—largely the result of conservation efforts and conservation-prompted technological innovation. (See USA Today here, and Tyler Cowen here)
So why have regulations worked here, when they’ve failed in other markets?
Part of the answer is that water markets aren’t competitive. They’re state owned and operated—all the way from water sheds to delivery pipes. That means prices aren’t set by supply and demand. They’re set by water authorities subject to political control.
Water authorities have historically tended to underprice water to consumers—i.e., below the true marginal cost of provision—because of equity considerations. The result has been consistent water shortages in the West and Northeast, and overuse by consumers and industry.
Many conservation efforts—like water-efficient appliances and low-flow toilets—have simply substituted the stick of regulation for the carrot of true market prices, bringing water use closer to efficient levels.
Of course, these conservation gains are probably a one-time bonus—there are only so many inefficiencies to squeeze out. At some point, water authorities will have to bite the political bullet and move toward a pricing system that charges water users the actual marginal cost of provision.
When they do, expect much higher water rates. And along with higher rates, expect huge business opportunities in fields like water metering and conservation.
After all, a basic result from property rights economics says the amount people will spend to measure and delineate property—including water—depends on its market value (think how carefully we measure diamonds, or gasoline at the pump, compared with water from from the sink…).
As water gets more expensive, look for more metering of apartments and rooms within shared housing, waterless technologies for the home and garden, and devices that help cut household water bills.
Posted by Andrew on Monday March 15, 2004 | Feedback?
