Thursday, November 01, 2007

Urban water pricing

Today I have been at the Wodonga campus of La Trobe University attending an interesting workshop on urban water pricing.

John Quiggin introduced the major ideas of the workshop with an interesting paper presented by teleconferencing from the University of Queensland. The actual teleconferencing worked quite well from our perspective though John could not see us. He looks very different without his trademark beard!

John noted the role of increasing population and what seems to be a longer-term trend of reduced flows into the water catchments of Australia’s major cities in creating an urban water problem. His general perspective is that in the short-run restrictions on water use have strong effects but price changes affect mainly incomes not demand. Longer-term restrictions wear out in usefulness but price changes have a more substantial effect. Hence use restrictions for short-term water supply issues but longer-term rely on price. Using restrictions to address long-term water shortages also reduces the availability of a key policy instrument for addressing short-term crises.

He argued that everyone agrees that prices must rise. The limit to price rises is the backstop cost of recycling water or the use of desalination technology which John valued at about $1-50 per kilolitre. This backstop cost can be much lower if rural water users can sell their water to urban users as they potentially can in, for example, Melbourne.

John’s suggested pricing scheme was a two part pricing scheme that would allow families a 50 kiloliter allowance per family member free coupled with marginal cost pricing at around $1-50 per kilolitre beyond that. This is a demogrant proposal – a lump sum grant made to families on the basis of some demographic characteristic – in this case just the number of family members. The idea is that most people will consumer in excess of 50 kilolitres per year so most families will pay the long-run marginal cost of water use boosted to account for the cost of the free allowance – so the scheme will be self-funding.

The idea is to move to offset the regressive effects of a move toward efficient pricing. The idea is to make the free allowance large enough to give families relief but low enough so households face marginal cost.

Alastair Watson followed with a discussion of the role of pricing concessions in water pricing – around 35% of households receive concessions which seems extraordinarily high. He also argued that the effects of concessions and free allowances will be swamped in Victoria by forthcoming price increases that stem from the flawed move to rely on a costly desalination plant and by the ideological opposition to new dam projects and to trading rural water supplies. The overriding principle should be that water should be supplied from the cheapest source.

This was followed by interesting papers by Geoff Edwards on efficiency issues , by Bethany Cooper who is studying the way water restrictions operate in NSW and Victoria and by conference organisers Sue O’Keefe and Lin Crase on how the demogrant proposal of John’s works out in a sample of Victorian households – it does indeed provide improved equity outcomes.

In a closing discussion attention turned to the case for a uniform price versus a IBT tariff (increasing block tariff) with almost all the economists favouring the uniform charge and some from the water utilities promoting the IBT as a means of encouraging conservation. The economics of this are simple – a uniform price makes sense because one wishes to equate the marginal cost of water use across users to achieve economic efficiency.

The demogrant proposal was criticised more strongly on the grounds that it seemed to be largely a cosmetic proposal designed to facilitate the achievement of uniform pricing rather than the IBT. In terms of addressing social welfare and poverty issues the value of the grant for a family of 4 with a price of water set at $1-50 per kilolitre is $300 or about $1 per day. This would have at best a very marginal effect on distribution. Generally there was opposition towards seeking distributive justice by tinkering with the pricing of goods that did not play a significant part in household budgets. The general tax-transfer mechanism would seem a better way of doing this.

There was also questioning of the implementation costs of the demogrant proposal in terms of the costs of identifying family size. If the redistributive benefits are very small then these might be swamped by transaction costs. It might be better to just go for aq stark uniform charge that was contingent on the current supply situation.

A well-organised workshop.


Sir Henry said...

A few years ago I went to the WA south-eastern wheatfields to write a story on the salinity problems there.

I came across an extraordinary situation. Towns such Dumbleyung, Narrogin, Katanning and Wagin used to collect their water from roofs and reservoirs of rainwater.

Then, your favourite agrarian bunyip socialist Charlie Court, in a rush of porkbarreling fever, gave everyone in the wheatbelt water at metropolitan prices that was actually piped in from the western coastal belt to "safeguard" the wheatbelt and "droughtproof" it.

Now the wheatbelt was created by massive, I mean massive "million-acres scheme" of extirpating root and branch all of the area's vegetation to make room for wheat. This policy was subsidised by successive governments from the turn of the 20th century and was part of the conditions of being given or sold land at peppercorn rent.

The result was a water table that rose and rose until it was 4 inches from the surface.

Taking out all the trees meant that there weren't any natural "pumps" with very long roots to keep the water table from rising. As the water rose it carried with it dissolved salt in the soil which sat there rather benignly until then for millions of years, locked up in solid crystals.

The cheap water meant that people used it with abandon, pouring it out which then drained down into the soil and thus raising the water table even more with the result that the dissolved salt as briny water spilled out onto the surface and killed everything, including pasture land, wheat, the lot. For the next 1000 years. It's a complete wasteland there now where nothing grows except purple bacteria.

Interesting isn't it?

robert merkel said...

With Alistair Watson's presentation, while I agree with the proposition that transferring water from rural to urban usage usually makes sense well before desalination, I'm very skeptical of the proposition that there is any substantial scope for new dams in Victoria, particularly in the Murray-Darling.

Did he have any specific examples of dams that should be built?

Anonymous said...

Why are you listening to Quiggin? The man is a socialist dinosaur.

Our water issue is two problems.

1. Lack of catchments

2. Lack of competition.

Solution. Sell the dams allow and anyone the right to sell into the distribution system that ought to be immediately split off and sold separately.

What we have a soviet command and control system that doesn’t allow the price signal to do its thing. Quiggin has as much idea how to fix the problem as a retard performing bargain surgery.

You don't know if the price is too high or too low, harry, until you allow thew market to make the determination.

hc said...

Sir Henry, I have a student working on salinity in the South West of WA and she will be interested in this account of the South East's history. Sounds liuke government failures in WA the story everyewhere.

Robert, I'll try to find out the dam site - it was near the Thomsom and definitely not in MDB - it was water for Melbourne.

I think the main point that Geoff Edwards and he made is that we should not close our minds to the possibility of extra dams on environmental grounds. The desalination plant may have even more adverse environbmental costs.

Anonymous, Under competition, price will gravitate to MC (marginal cost) so a publicly run system can mimic a competitive system by pricing at MC. Of course private incentives can be fostered to increwase supplies from recycling and other means.

John Q is anything but a socialist dinosaur. In fact his demogrant proposal is close to the outcome one would expect under free competition - the free allowance bit an encouragement to switch to a less than rational system.

Sir Henry said...

I have a fair amount of research material about salinity, to which your student is welcome. In the meantime I'll post a photocopy of the article as there is some useful starting points plus a history of this manmade disaster (plus some telling photos).

robert merkel said...

If they're not in the Murray-Darling, that basically leaves the proposals (more thought bubbles, quite frankly) being pushed by the Institute of Public Affairs for dams on the Mitchell or MacAlister rivers.

Both of those rivers drain into the Gippsland Lakes.

Has anybody claiming this is the cheapest option actually costed the additional damage to the Lakes by diverting more inflows to them?

derrida derider said...

I'm intrigued by the assertion that pricing water higher would be regressive. Has anybody actually done a proper incidence study on this or is it just guesswork?

My own guesswork would be that it's quite progressive - it's not the poor that have extensive gardens, multiple bathrooms and lots of windows and cars to wash.

hc said...

Alistair Watson argued that the best new dam opportunity was on the MacAlister River to the east of the existing Thomson storage.

I'll ask about damage to the Lakes.

hc said...

dd, I assume it is guesswork though Lin Crase and Sue O'Keefe are working on this distributional issue. I think the income elasticities are quite high beyond low incomes so you may be right.

Anonymous said...

Don't be idiotic, Henry. The Soviet economsits did all they could to mimic a price system and failed. You don't know the marginal cost, you fool, because you don't know what efficiences could introduce under a market based system.

"John Q is anything but a socialist dinosaur"

Quiggin is nothing other than a socialist dinosuar and I'm simply shocked Harry would take the clown seriously on any subject. He understands next to nothing on economics.

"In fact his demogrant proposal is close to the outcome one would expect under free competition - the free allowance bit an encouragement to switch to a less than rational system."

Are you toally stupid or are you taking illicit drugs? How on earth would giving out free water mimic the free market, you crank?

Public goods and services are always followed by shortages. It's the nature of this model and always has been as the Soviet model would attest.

hc said...

Anonymous, You sound like someone I know. The free water part of the proposal is an attempt to set it against the inevitable opposition that will stem from bleeding hearts who worry about effects on the poor.

Anonymous said...


The water systems currently run by these state socialist slag heaps are actually very profitable so it is not a given that we would incur high costs for water over the longer term if producers were allowed to enter the market unimpeded.

Quiggin's proposal is a rationing system. There is nothing at all about it. The soviets were using a similar system when rationing food.

Ask yourself: would you want the Government to provide for your food supply? Your answer ought to be yes if you support Quiggin's socialist nonsense.