28 June 2010

Wrong prices are expensive

We were recently on Utila, in the Bay Islands of Honduras.

Utila does not have a huge supply of freshwater. The local water authority rations water by turning on the pumps four days a week for customers who pay $30/month for all they can use.

Customers have to store water in tanks for the other three days. If they run out, they have to pay for trucks of water that cost $40/each. (The trucks are filled from private wells.)

The owner at our hotel says that his monthly water bill sometimes goes to $1,000, since he needs to get three trucks per day when people use a lot of water. (There are signs in the rooms saying "use less," but guests face no penalty for 30-45 minute showers.* Lots of people on Utila are there for the diving.)

Oh, and the water is not only unsafe to drink. It has so many minerals that it corrodes pipes and clogs the showerheads, which are replaced monthly.

This is a good example of where low prices lead to expensive shortages. Businesses on Utila could benefit from water meters and volumetric pricing. The meters would cost about $200-300 to install, and higher prices would make it easier to reduce demand for water. With less demand, supply could be stretched over 7 days, reducing the need for tanks and tankers. Businesses would pay more than $30/month, but a LOT less than $1000.

Bottom Line: The end of abundance means that water utilities have to change their business model. The cost of inertia is high -- in money and shortages.
* This problem can be solved by "3 minute" shower buttons that either have to be pressed or re-activated with a token or coin.

1 comment:

  1. WH emails: "It’s a case of price not allowing to function as the rationing agent. You have a habit of framing the argument as a price increase (meters, cost per gallon, etc). Its not a price increase, it allowing price to reach equilibrium.

    An artificially low price is related to control which would mean price fixing of some sort. Price fixing always shows up qualitative and quantitative regarding supply. "

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