In a moment of idleness I analysed my water bill on this blog and decided that, with current pricing rules in place, I had low incentives to change my household’s relatively high usage. John Quiggin in today’s Australian Financial Review (subscription required) nicely analyses the case for using price rather than quantity restrictions to manage urban water use in Australia. This is topical as the Victorian Government announced today scaled up fines for using water ‘wastefully’ and a program of moral exhortation to cut Melbourne’s water consumption by 30%.
In resource economics quantity restrictions are often advocated for dealing with short-term emergencies while pricing is often seen as a more efficient way of managing use longer-term. This is John’s approach and I agree 100%. Particularly if price increases rise steeply enough with increasing household usage. The failure to impose a steep gradient on prices in Melbourne is the reason that, as discussed above, I am rather slack in limiting my family’s water use.
John’s argument too, is that using price to balance supply and demand in the longer-term leaves open the option to use quantity restrictions to deal with short-term issues shocks such as droughts. Otherwise draconian restrictions or price increases are needed during shocks which hurts all. Moreover, attaching a price to water encourages appropriate cost-efficient investments in water conservation in urban and rural sectors. Currently, driven by quantitative restrictions, excessively expensive conservation investments are occurring in urban areas when cheaper conservation measures could be initiated in the country.
John’s aricle is posted at the new RSMG blogsite he has set up.