4 May 2008

Water Tanks

Speaking of poor countries, Sam blogs on water tanks in Nicaragua. I've seen these tanks in many many countries. People get them because the local water supply sometimes goes out, leaving the pipes dry. Since, dry pipes can stop a household from working, people buy tanks to store water until water flows again. Sam, rightly, points out that tanks in every household are a waste of money (just as a generator in every household -- to give power during outages -- is a waste of money) and speaks in favor of higher prices "because there is not enough water for continuous service." Higher prices would mean that people would use less, and the pipes wouldn't go dry.

That solution may work, but it depends on the local situation.

If demand is greater than supply at the prices charged, then water will have to be rationed. Rationing can occur by raising prices* to reduce quantity demanded or limiting total quantity supplied at "too low" (even zero) prices. The presence of storage tanks indicates that quantity rationing is what's going on.

What's responsible for quantity rationing? If dry periods are fixed, then people fill their tanks until the water goes off. Fixed dry periods are consistent with centralized water pumps that must serve several areas. Another possibility is that power (not water) supply is limited. Power supply may be price or quantity rationed as well. If power prices are "too high," the water company, which loses money because it sells water too cheaply just pumps enough water to keep people from rioting. If prices are too low, it may be the power company that is quantity rationing (no doubt they will say that water rationing is causing it :)

If dry periods are variable, then it appears that the water company is trying to allocate a fixed quantity of water every day. Households will respond by trying to capture the biggest share possible -- to fill the biggest possible tank -- before the total quantity available is exhausted.

Neither scenario sounds good to me, and both tend to favor the rich -- who can afford tanks.**

So where do go from here? I tend to side with Sam's POV.

Bottom Line: When water is given a low price ("to help the poor"), it often ends up hurting the poor. Raise prices on high per-capita demand, keep the pipes wet, and help the poor.

* Sam advocates a cheaper price for the poor; I advocate a cheaper price band for the first x units of water -- an increasing block rate.

** I am assuming that the poor have access to piped water. Many poor people do not; they buy water from "freelance" water services.

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