3 Oct 2008

Conservation Pricing

Regular readers will know that I advocate higher prices as a means of reducing the quantity of water demanded. (It's just an application of the Law of Demand, which states that people demand less of a good as it becomes more expensive.)

Note that demand can be reduced in other ways, i.e., by requiring that technology be adopted (e.g., low flush toilets) or by a change in attitudes (e.g., people deciding that green lawns are not appropriate). Economists say that these reactions are shifts in the demand curve, while reactions to changes in price are movements along the demand curve. Shifts tend to last longer than movements, but both give the same result -- less water used.

These basic ideas may be too theoretical for some people, which is why I was thrilled that MU sent me an excellent paper demonstrating the concepts in action. In this 1997 paper [PDF], Loaiciga and Renehan discuss how Santa Barbara's implementation of radically higher prices during the 1987-1991 drought reduced demand.

The short story is this. When the drought started, water was priced at a flat rate, i.e., the price/unit did not change when people used more units. In 1990, after the drought began, the price schedule was changed to an increasing block rate (the first unit was $1.09; later units were $1.58, 1.97 and 3.01). After six months (as shortages grew worse), prices were radically steepened: first units at $1.09, then 3.27, 9.81 and 29.43/unit, as people used more. (A unit is 748 gallons or one-hundred cubic feet of water -- abbreviated HCF.)

Note that the median household in this period reduced its use until it paid a marginal price of $3.27/HCF, i.e., the price in the second tier that was higher than the lowest price by lower than quite expensive, third-tier prices.

The median user's behavior indicates (to me) that the very presence of increasing block rates is perhaps just as important (or more important) as the size of the jump between blocks, which were calibrated in a way that made them relevant -- and effective. (If the next block is too far away to affect usage, it's as if it doesn't exist at all.*)

Of course, prices were not the only means of affecting demand -- there were "conserve water" campaigns, watering restrictions, etc. -- but prices were a firm reminder to everyone (including those who didn't care for conservation ethics) that water was indeed in scarce supply. (Few people paid $29.43/unit, but they knew that water uses at that level were very "costly" to the community.)

What's interesting is the way that these prices permanently changed people's habits and attitudes. Before the drought, median household usage was 9 HCF/month (about 25.5 m^3/mo). During the drought, it dropped to 6.3 HCF/month.

Overall usage -- controlling for population -- dropped from 7.8 million HCF in pre-drought 1986 to a low of 3.9 million HCF in driest period (1991), i.e., by roughly fifty percent. After the drought ended, water use rose to 4.8 million HCF -- higher, but still only 62 percent of pre-drought levels.

The paper is packed with statistics, so here are a few more:
  • The average price/HCF was $1.18 in 1986. It rose to $3.49 in 1991 and stayed at that level or higher.
  • The City of Santa Barbara used this extra revenue to pay additional "drought-proofing" costs, e.g., building a desalination plant (now on "drought standby") and connecting to the State Water Project.
  • Before the drought, 15% of households used more than 30HCF. During the drought, none did. After the drought, less than five percent of households returned to these consumption levels.
  • According to this report [PDF], per capita water demand went from 158 gal/day in 1980 to 94 gal/day in 1990 to 111 in 1998 to 121 in 2003.
Bottom Line: People pay attention and change their behavior when the price of water increases. Every drought plan should include significant price signals as a means of reinforcing "conservation ethics."

* LADWP's blocks appear to be this way -- they jump after 14 HCF/month and only by 15%. Even worse, houses on bigger lots get a bigger allowance at cheaper rates.

6 comments:

Anonymous said...

You can lead a horse to water, but can you make a horse drink.
The world’s freshwater resources are not sufficient to keep up with demand.
As the world population grows and water tables decline, a solution has to be developed. Right now, that solution is desalination and Water Desalination International, Inc. will unveil a desalination process the Passarell V.E.S. to solve that problem. This process separates potable water from the elements in seawater, using the gravitational influence in an ambient vapor field. The extraction of drinking water leaves a wet crystallized salt eliminating waste brine from being returned to the sea and thus preserving the environment. Crucial environmental enforcement is necessary to preserve the environment. There are Extra benefits obtained from the crystallized salt through the sale to commercial markets, lowering the cost of drinking water. To preserve the environment WDI has developed a multiple pod system a technique of subsurface ( below the seafloor) seawater retrieval. For this environmental practice and the reduction in costs, the Passarell V.E.S. seawater desalination process will reduce the cost of drinking water. WDI has broken the high price of drinking water from the sea, and lowered the cost of desalination by two third the costs of conventional process such as Reverse Osmosis. Soon-to-be operating in Saudi Arabia.

Anonymous said...

You are missing the key point: Economically efficient water pricing will cause demand to be reduced, via shifts and movement along the demand curve, to a point that renders these projects unnecessary. The point is that there are sufficient resources but we aren't pricing them efficiently which leads people to conclude (incorrectly) we need desal and other capital intensive projects.

David Zetland said...

I agree with Anon #2!

Dr. Hamid Rasool said...

The judicially formulated water law of the western states which was established approximately a century ago known as "the law of prior appropriations" should be reconsidered and repealed. The public policy goal of the western states at that time was to encourage the filling of the western states with people. That not inappropriate goal has now been fully accomplished. Prior appropriation and "use-it-or-lose-it" laws have permitted out-of-basin water sales and water rights transfers to be made since that time, even though serious damage has often resulted from the repeal of ancient laws permitting only riparian use of river waters. For one example, such laws permitted the remote use of Sacramento River water to wash out and sluice away the dirt of California hills in the quest for gold even though the resulting runoff began to ruin the River itself. Another example of present day ruination resulting from these gold-rush days prior appropriations legal doctrines is that the continued existence of these laws has caused the complete and total appropriation of every drop of water out of the bed of the formerly majestic Colorado River.

Legal precedents and state laws permitting prior appropriations, out-of-basin transfers and unrestricted water rights sales are an historical anomaly and are no longer necessary and should be abolished in order to return to the ancient law permitting riparian use only so that public resources such as our western rivers will once again flow freely into the sea.

Your suggestions regarding water rate increases are surely well intentioned but will not free our western rivers from the clutches of the people, states and corporations who have now seized these public resource rivers for their own selfish benefit under obsolete water laws.

Peter Amschel water lawyer.
University of Wyoming College of law Class of 1972.

Dr. Hamid Rasool said...

bro - I dare you to post that one

David Zetland said...

Dr. Rasool -- double-dare you! :)

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