Monday, May 4, 2009

Circling the Drain*

Prices are amazing things. They communicate the relative scarcity of goods and services to all who wish to look at them. The importance of this information is that it allows producers and consumers to engage in economic calculation. In other words, in an instant you can look at the price of something and determine if it’s worth buying. When everybody makes such lightning quick calculations, the result is an efficient allocation of resources and a minimization of waste.

Market prices are created by the interaction of all those that consume the good (demand) and all those that produce the good (supply). When there is more demand or less supply, the price increases, signaling to all to conserve the resource and look for substitutes. Additionally, the extent to which the price has gone up (3% or 300%) signals how much of a change in behavior is necessary. Even if consumers and producers do not even know or understand why the good is more scarce; they all know to conserve it.

Unfortunately, this very important function of prices only works in a market. When a price is arbitrarily set and imposed on consumers, there is no information of relative scarcity. There is no real information for anyone to make a correct economic calculation.

Sadly, the City Council of Raleigh has been completely thwarting the formation of market prices for water. They arrogantly believe that they know more about the scarcity of water than do all of the users and providers combined. Raleigh’s City Council voted 6-2 last Monday (4/27) to raise the price of water by 23% by the end of the year. I ask why this amount? Why not 4% or 40%? Why should there even be an increase? There is no economic answer to these questions since there is no market for water.

North Carolina has been struggling with drought conditions for the past several years. If we had a market for water, prices would have risen. An increase in price has two effects: people cut back on how much they consume and producers produce more. Unfortunately, local governments claim ownership over water. There is no market. The local governments simply pick prices that they think are politically viable.

During the past drought, Raleigh and the State of North Carolina convinced people to use less water, by buying rain barrels, for example. The marketing campaign worked and the amount of water consumed dropped dramatically. As a result, the revenue from water has dropped off. In a budget crisis, the city council wants more revenue and so they are raising rates. Despite their lip service, this increase is not for economic or environmental reasons.

The Cold War has been over for almost 20 years. It is time to stop letting councils or politburos set prices. Water is too precious a commodity to let politicians play politics with it.

Now is the time for the City of Raleigh to get out of the water business. Cities across this country have been selling the water business or at least contracting out the water production services to the lowest bidder. The results are lower costs and higher quality. Other cities such as Atlanta, Jersey City and Indianapolis, have experimented with privatizing water services and the lessons learned will be enormously beneficial to the Raleigh City Council when it follows this path.

Some cities have had problems in the past because they simply have not gone far enough. They think that since they were a monopoly provider that only a monopoly should take their place. There is no reason for this. The market needs to be thrown open to all companies that think that they can produce and provide water to the metro-Raleigh area. Many services that were once thought of as monopoly-only markets are radically different today because the market was thrown open. Think telephones. As a general rule, the more companies that produce a service, the lower the price to consumers will be.

If there are several companies competing for your customer dollars, you will see a dramatic change in the way people buy water. Right now, I have no idea how much water I am using and how much I am being charged. However, today I can go online and look up how many minutes I have used on my cell phone plan. How can people accurately conserve water if they don’t know how much they are using?

Most importantly, if a market for water is created, market prices will emerge. They will shift and change to supply and demand conditions. If we are hit with another drought, prices will rise and consumers will know exactly how much their activities are costing them: $15 to water the lawn; $8 to wash the car; $1.50 to take a shower; etc. Then individuals can be free to choose how to live their own lives. No more draconian water police sweeping through neighborhoods, issuing citations of violation and fines. People with established lawns can make their own decisions on how to cut back and people with new lawns won’t have to beg at the feet of the bureaucrats and politicians.

Markets are economically efficient and are the best path to ensure liberty. By allowing politicians to control something as important as water, our livelihoods, our standard of living and our liberties are certainly circling the drain.

*This is an expanded version of the Op-Ed in The Garner Citizen News and Times, May 13, 2009.


Rainey Buscher said...

Well I am a far cry from anyone knowing anything about the economy butI am interested in the subject...

Now our water bill at then end of the month does tell us how much water is being used. We may not understand the breakdown of that usage at this point but maybe we should look into it. Perhaps healthy legislation should be passed that every water utilization device such as shower heads, dishwashers, faucets, toilets, should have a universally accepted gallon-per-minute (GPM) stamped on it in a standard place. Now most of this utilization equipment has this information in the manual or cut sheet. manufacturers want to be competative and water conservation of a device or fixture is a feature some people look for. Toilets have become a target for conservation as they are the largest user of residential water at 26% of total residential water useage. Still some homeowners have been dissatisfied with the operation of the "low flow" toilets stating that they must flush them twice which uses more water than a standard toilet. Clothes washers and dishwashers strive to utilize less water as "green" trends and pressures move the market. Still leaks in houses account for 13% of residental water useage, to which we are somewhat oblivious.

I think all in all we need to understand better our water utilization in terms of each device, down to the garden hose sprayer so we can make more wise decisions in utilizing and conserving this resource.

The water market surely needs to be open to competition which will drive down prices and encourage water product standards. It will also prevent taxpayers from paying for ageing facilities to be rebuilt and replaced as much of this infrastructure has years of age on it.
There is surely much to consider in this concept and I'm sure that we will hear more of this subject as the end of the year approaches in Raleigh

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