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.