Demand Side Update

Frequent readers will know that I advocate higher prices as a means of reducing the quantity of water demanded* (and thus water "shortages") -- mostly as a counterweight to the hordes advocating increased supplies.

So, here are some updates on price increases and demand reductions:

1. Laguna Beach is implementing increasing block rates, but they are too wimpy: Initial blocks cost $3.02/748 gallon unit; "expensive" blocks cost $3.29. (How about something more aggressive -- like $6.00?) Interestingly, people in Laguna Beach (a rich area) pay about $100/month for water service.
   
2. Carlsbad (San Diego county) is raising rates as well -- from $1.76 to $2.12/unit. (Average water bills are about $55 there.) It's important to note that a 20 percent increase works out to a trivial $ increase, i.e., about $10/month.
   
3. This story describes how NOT to raise rates -- or how rates that should have been raised were not. The cost of water went up, but savings were "found" elsewhere, so customers are NOT seeing higher prices when water is in shorter supply. In 2010, they will -- up 21% Hopefully, there will still be water around to sell at those rates.
4. Meanwhile, water use is down in LA and Long Beach, through a combination of water awareness and "water cops". I was interested to see that LA's water cops issued 558 violations. Even at $100/pop, these generated far less revenue than the cost of one cop. (There are at least 20.) There is, of course, the value of fear, but didn't we just vote for more Change and less Fascism?
5. Elsewhere in Southern California, managers are resorting to time-tested (and still useless) restrictions and ordinances of appropriate behavior. Unfortunately, one neighbor will get in trouble for washing his car when another neighbor is left alone to water her "golf course" lawn.
6. Another manager tries to get appropriate behavior by educating customers on conservation. She complains that customers see drought as a temporary phenomenon, and that they need to see the Big Picture.

Notice the common theme in all these stories? Managers are NOT implementing conservation prices that reflect the reality of scarce water and give customers an incentive to save water. Higher prices would reflect the fact that SoCal is a desert with falling water supply. Raise prices and let customers decide how to conserve water. No cops, no rules, no rationing, no "Mr. Drippy" ads.**

Water managers only defense (to me) is that they are not allowed to raise prices above cost -- as I advocate. Water managers could get this law overturned -- if they were brave. (They would get brave if those who rationed lost their jobs.)

Bottom Line: Reduce quantity demanded by raising prices. It works -- really.

* That awkward wording is important to economists, who say that a "fall in demand" result from changing attitudes towards the good, i.e., that wasting water is a bad habit. A reduction in quantity demanded holds attitudes constant -- only paying attention to the impact of price.

** In this paper [PDF] Olmstead and Stavins conclude:

Using prices to manage water demand is more cost-effective than implementing nonprice conservation programs. The gains from using prices as an incentive for conservation come from allowing households to respond to increased water prices in the manner of their choice, rather than by installing a particular technology or reducing particular uses, as prescribed by nonprice approaches... Under price-based approaches, low-income households are likely to contribute a greater share of a city’s aggregate water consumption reduction than they do under certain types of non-price demand management policies. But progressive price-based approaches to water demand management can be developed by returning some utility profits due to higher prices in the form of consumer rebates.

Sound familiar? Another set of economists who agree that prices are more efficient, equity can be protected through rebates, and (incidentally) that prices are "too low" for 20% increases to change people's behavior.

hattip to DW