10 Mar 2009

Water Wizards [NOT!] of Oz

TT, TJ and BR all sent me this post in which Chris Brown tears into the misguided policies that have led to water shortages in Melbourne, i.e.:
It is near impossible to imagine any private company not enjoying the "problem" of high demand for its products and services. Yet there are some products that are repeatedly reported as shortages. There is one thing these products have in common: government intervention, typically in the form of price controls.


Despite almost yearly decreases in water storage in Melbourne (see figure 1), real prices have not increased significantly. And currently the "Essential Services Commission" will be setting prices for the next five-year period. This means, regardless of supply or any number of variables and uncertainty, (real) prices will remain roughly the same for five years. In other words, expect continued shortages.

Instead of economical pricing there is political pricing, where pressure groups and special interests are given "rights" to use water during droughts, and at subsidized pricing. Businesses are able to use water for irrigation in the name of boosting GDP, while individuals are asked (or forced) to consume less and less. Government as the friend of the little guy is simply a myth.
Brown goes on describe the additional mistakes that water managers are making (command and control over water use) as they attempt to rectify their initial mistake.

I recommend the whole thing with one caveat: I do NOT think that water needs to be privatized to create the proper incentives for conservation, since private monopolies can be just as inefficient as public ones. What's needed is better community control of water -- so that it's used to maximize total welfare.

Note: (via TS) Some Aussie businesses think that shortages are because water is "too cheap," but others are waiting for the government to increase supply via desalination (yikes!).

Bottom Line: Water managers and politicians are responsible for water shortages. Price water according to scarcity and end the shortages!

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