26 June 2009

Shocking News! Prices Change!

I get lots of emails with water news, and many of them have headlines like "XYZ agency raises prices..."

Now, I do not get emails from shoe stores, gas stations, advertising agencies -- or pretty much any other industry on price changes. Why? Because price changes are normal in those industries.

From that simple observation you can gather what is NOT normal in the water business: price changes. Why? First, because price has never mattered very much. Price was set as a residual decision, after the more important decisions of where to build pipes and plants was made. Second, prices were often set by political processes, and -- as most of you know -- getting agreement in a political setting is quite the WIN.

So here's my hope: The price of water rises and falls with scarcity abundance -- signaling to people whether water supplies are trending below or above demand. That would be so... normal.

Bottom Line: Prices are the most powerful signal that we have in economics. It's time to use them with water.

3 comments:

enviroecon said...

It's a nice weekend wish: that market failures be corrected.

DW said...

On the electric side, smart grid is all the rage. Utilities are installing smart meters that can tell customers how much energy they are using in real time and what it will mean for their bill at the end of the month. I expect it will take the water industry a decade or so to catch up.

enviroecon said...

@ DW

Makes all sense to do so. From Psychology, we know that reinforcement and punishment are more effective as means of changing behaviour the closer they are to the actual behaviour. In a way, the most efficient way to price would be to force people to insert a coin or swipe a card immediately before or after using water.