Water restrictions in Melbourne

The Stage 3 water restrictions that are being used to restrict household water consumption in Melbourne arise because water is under-priced so that an excess demand for it must be dealt with by means of restrictions.

The main implication for households is that gardens in Melbourne can only be hosed twice a week for 2 hours in the evening. In addition, if you wish to top up your swimming pool, you must use a bucket and a tap – not a hose.

These restrictions are asinine given that the water shortages are a longer-term not a short-term issue. The best way of rationing something like water in the longer-term is to charge a price that clears the market for it. Then the water that is used goes to its highest-valued uses. If one does insist that pricing must reflect distributional concerns, so poor people need access to water at low prices, then a two-block scheme can be used. Water is given at low or zero price up to a fixed number of liters per month and is then charged at a sufficiently high rate to clear the market. This two-block scheme is better than the current three-block scheme but inferior to a scheme where every consumer is charged the same price (the scarcity value of water at the margin) with poor consumers rebated all or part of the implied costs that would have been incurred in providing the subsidized water at the initial low rate. They cannot be worse-off since they can use the subsidy to pay for the efficiently priced water or for anything else they might want.

The restrictions are being policed by ‘water police’ and dobbing-in your neighbor is widespread and encouraged. Quote: ‘To report a breach, call 13WATER (139 2837)’. Dobbing-in is something I intrinsically dislike, particularly at the neighborhood level, but some I know self-righteously see it as their moral duty. I always find it interesting that such measures are introduced by our Labor government comrades.

The restrictions though are having some good economic effects as would just charging higher prices. Swimming pool covers are being sold which reduce evaporation from pools and hence the need to top up. New pools can be filled with salty aquifer water which will be delivered onsite for about $2000 for an average pool.

With respect to gardens the water shortage is encouraging more sensible watering practices such as the use of grey water and rainwater tanks. It is also encouraging people to pave yards rather than to pursue high maintenance lawns – the paving moreover, in some cases, is porous and allows water to soak into the ground supporting adjacent gardens – rather than becoming runoff. Finally, the restrictions are driving people to reconsider the case for native gardens which, as I have long argued, make sense on the basis both of aesthetics, environmental benefits and particularly, in the present context, of being water-friendly.

These moves to rationalize water use have reduced demand but would work more effectively with rational water pricing. This would also send out the correct signals for firms to augment private water supplies and for both firms and households to recycle.

Finally, rational pricing would also allow gardening fanatics and swimming enthusiasts to enjoy their pleasures and to pay for such pleasures by funding the cost of these indulgences.