The water shortage issue is often discussed in Australian capital cities such as Melbourne (see here). Often one suspects much political humbug behind dire warnings of imminent water shortages. Even though Melbourne's water storage levels are only around 54% capacity we have plenty of water for several years. Nevertheless, water supply companies have introduced block pricing schemes to encourage more efficient usage. These schemes also deliver useful 'second-degree price discrimination' that extracts surplus from customers. One can ask how effectively they will reduce demand. Do they work? Let me do arithmetic on my own water bill.
I just got my bill from Yarra Valley Water. I live in a 5-person household on a reasonably large suburban block, with a swimming pool, a self-watering fernery and quite a large, infrequently-watered garden. My bill was $288-65 for the 3 months to February for an average daily usage of 136 kilolitres or 1,478 litres per day. Does seem a lot.
Of this there was a fixed water service charge of $14-495 and a fixed sewerage service charge of $35-41 so total fixed service charges were $49-89. Water charges also have a variable block structure. Water costs $0.7822 per kilolitre for use up to 440 litres per day, $0.9177 per kilolitre for use of 440-880 litres per day and $1.3558 per kilolitre for use beyond 880 litres per day. Finally, sewerage charges are calculated at $1.0116 per kilolitre for estimated water entering the sewerage system (0.864X usage) adjusted by a seasonal factor (now 0.5750).
I was interested to calculate my savings if I cut my family's consumption by 25%. This would be a very severe cutback for usbut would reduce our overall usage to about the median for the population as a whole for 5 people with a large garden.
Is the block-structure of charges steep enough to give me incentives to do this? With this cut my use would fall to 102 kilolitres in total. Fixed costs would be the same at $49-89 and my first two blocks of usage would still cost me $31-66 and $37-15 respectively. My costs of using the expensive 'third block' water would fall from $74-62 to $28-52, a saving of $46-10. My sewerage charge would fall from $68-38 to $51-28, saving $17-10.
In all a 25% reduction in use would reduce my costs by $63-20 or by about 22%.
This is a fairly hefty impact but I probably still will not change my behaviour much since water is very cheap and occupies only a small part of our household budget. For such goods economic theory suggests demands will be quite price-inelastic. Moreover these water purchases yield us lots of consumer surplus. We enjoy the luxury of high quality, relatively inexpensive water supplies. Our total water use costs $3-20 per day and the marginal cost of a litre of water is about 0.2 cents. A stringency program of cutting back use by 25% would save only 71 cents per day which would not cover the pain of trying to get everyone to cut use. In 3 days the savings would just fund my morning long-black at Caffeine. I have other priorities.
So while I would get reasonable savings by launching a stringent water conservation program with water so cheap, the effort isn't worth it for me.
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4 comments:
Harry, a couple of points.
The major concern for the water authorities is not a lack of water right now, but that as this graph shows, after the water level dropped 50% between 1997 and 2000 it hasn't subsequently returned. This makes Melbourne vulnerable to another long-term (2-3 year) drought.
The fluctuation in demand for water depends almost entirely on the amount falling from the sky. This isn't a bad thing, because if the water authorities were acting as businesses it would actually make sense for them to maximise water consumption and the water price at the expense of the rivers and streams they are taking it from. Historically the MMBW was operating like that for many years (see A Drought Walked Through by Keating or Vital Connections by Dingle and Rasmussen). However, it also means the real driver of water usage is whether people's gardens need water. Theoretically this means water prices should be significantly higher during a drought (even on a month to month basis) but the government has always preferred restrictions to harsh pricing.
Russ, Thanks for the great graphic! Was 1997 an outlier year? There has been some recovery in supplies but not much I agree. A long-term drought of 2-3 years would test most water supply systems.
The point of my comment is that we charge almost nothing for our high quality water supply so that high levels of use can be expected.
I agree. Pricing water high level during periods of shortage makes a lot more sense than pricing it low and imposing restrictions on use.
On gardens. I find it hard to rip out water-loving exotic plants like camelias but am trying to replace all exotics that die or look a bit sick with natives. I must admit the main concern is to cut back on garden maintenance rather than reduce water use but effect is the same.
The ABC have This story that our water prices are set to become the most expensive in Australia.
It closely mimics the recommendations of the 2007 report reported here
Incriminatingly, the rate rises will help pay for expensive infrastructure, that it would seem the Government is going to purchase for ACTEW. Benny Hill just turned in his grave, for somebody just started playing his soundtrack really loudly in Canberra.
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