Here’s A Thought: Instead of Drought Orders, Try Prices!

Lynne Kiesling

Due to a sustained shortfall in rain, portions of Southeast England now face a drought order for the coming summer:

England’s first drought order in a decade was imposed in the South East today as fears continued about a water crisis in parts of the UK.

Sutton and East Surrey Water was granted the order by the Department for the Environment, Food and Rural Affairs, giving the company the power to limit or ban non-essential uses of water.

Mr Pearson granted the order after hearing from an independent inspector that there had been an exceptional shortage of rain, and that without the ban there would be a real threat to domestic water supplies in Sutton and East Surrey.

I’ve been listening to BBC Radio 4 all morning, and the ministers talking about conserving water and inveighing everyone to cut back were out in force. So, too, were consumers who bristled at the apparently stringent constraints on water use under this order.

You know, we could knock off all of the top-down order-giving, whingeing, and sense of entitlement in the face of scarcity if we had water markets. With price signals.

Think about it: what if water were priced more like gasoline? We have robust, liquid petroleum spot and forward markets. At $3/gallon for gas and $70/barrel for oil, we don’t have shortages or lines. That’s a functioning set of price signals.

What if end-use customers paid prices for water that reflect true opportunity cost? If I were worried about the reduction in my supply, then I would have an incentive to sign a long-term contract with a fixed price. If I knew I could save some money by cutting back my water use if the price rose, I might want a volumetrically-differentiated tariff (i.e., volume pricing, but not volume discounts: volume surcharges).

Prices signal scarcity and opportunity cost, and they do a better job of inducing people to conserve than pleading with them in the public interest. Will the UK government, or any county council, show economic policy leadership and recommend moving from draconian regulation to a decentralized price system to allocate water? As much as it would benefit the people living there and aid in conservation, I doubt it.


4 thoughts on “Here’s A Thought: Instead of Drought Orders, Try Prices!

  1. If higher water prices actually reduced consumption proportionally, wouldn’t they need windfall profits taxes to punish the water companies for maintaining income while sales were falling? “Merry Olde England” does have panderers (oops, politicians) doesn’t it?

  2. Was writing about this too and found your article on Technorati.

    Couldn’t agree more. What gets me is how everyone whines about the installation of water meters, which would be the first step towards charging the users for the good. Don’t understand how people can moan about water shortages on the one hand, and argue that the amount they pay shouldn’t be related to the amount they consume on the other.

  3. Was writing about this too and found your article on Technorati.

    Couldn’t agree more. What gets me is how everyone whines about the installation of water meters, which would be the first step towards charging the users for the good. Don’t understand how people can moan about water shortages on the one hand, and argue that the amount they pay shouldn’t be related to the amount they consume on the other.

  4. It’s worse than that. The water companies themselves don’t even have to pay for the water they abstract. The EA licenses water abstraction and merely charge the administration costs. Water companies charge the customer up to 100 times what they pay the EA. Since water is effectively free there is no incentive to fix leaks and every incentive to apply for drought orders.

    MK

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