Tuesday, April 13, 2010

Dumbest Use of (Non-)Economic Principles?

Every once in a while I come across something that is so profoundly dumb, that I know that it cannot be true. This was the case when I saw the Headline: "Flush with water, Raleigh could soon raise rates again." I have touched upon this topic before in the post "Circling the Drain." However, this time the problem is exactly the opposite to the previous problem.

The municipal water system for Raleigh and the six neighboring towns says that since the drought of 2007/2008, water consumption is down 7%. This comes as no surprise because many people installed rain barrels and are using other water saving techniques. During that drought, we were not allowed to wash our cars, get a glass of water at a resturant without asking for it, or even allowed to properly water our lawns. Many of these regulations have been lifted, but many people have kept their conservation habits. (At my house, we are switching over to a grass that uses much less water. We have been letting the Fescue grass die while allowing the Bermuda grass to take over.) With this decrease in water usage, our main reservoir, Falls Lake, is actually one foot above full.

Everyone, especially conservationists, should be happy. And everyone is happy. That is everyone except the Public Utilities Department. The P.U. Dept. is funded by water and sewer fees and their revenue is falling with the decrease in consumption. Their problem is to increase water usage and thereby increase their revenues. They should want to sell more water. The answer may seem obvious, and it is, except to the P.U. Dept. What does the P.U. Dept want to do instead? (So here it comes, ready for it?) The P.U. Dept wants to raise the water rates!

Now I may just be an economics professor, but I do know that demand curves slope downward.

This is a demand curve. It shows the relationship between prices and the quantity that consumers want to buy. When the price goes up, people are going to buy fewer goods. When the price of gasoline went up to $4/gallon, people cut back on the amount that they consumed. When we were in the drought, economists argued that raising the water rate would encourage people to use less water.

On the other hand, if the producer wants to increase sales, the producer will cut prices. Let's pretend that inventory has been increasing and it's time to clear some shelf space, what do you do? You have a sale. In other words, a price cut will encourage more people to buy more. Even the word "sale" should make this point fairly obvious.

The same works for water. If we raise the rates (price) for water, we will not be decreasing the surplus of water! If anything, we will be incentivizing people to reduce their water consumption even more!

During the drought, the water authorities said that we couldn't raise the rates to decrease water consumption, because it would unduly burden too many people. Now, because revenues are down, has this concern been thrown out of the window? It shows where the government's priorities lie. They care about their budgets first and the voters second. (I don't know where you fall if you aren't even a voter.)

In my earlier article, I called for a true privatization of the water supply. Only under a market, can we avoid the backward thinking of bureaucracies and get a system that serves the customers.


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