Why it isn’t simple to charge market rates for water. Background.

I see this stuff all the time (sometimes, I see double!): an oversimplistic assessment that raising rates for water would end shortages. I am, actually, in favor of charging by unit of water (so you pay more when you buy more, a concept so straightforward that it is embarrassing to have to say it explicitly, but not always the norm for water pricing). I am also in favor of charging a rough marginal rate for water. These days the cheap chunks of water are thoroughly exploited and the next source costs more to collect, treat and deliver. I’m fine with water users seeing that cost for what it is. So it isn’t that I’m opposed to the concept of raising rates on water. But I do get frustrated when people act as if that is straightforward and obvious and the full solution. Districts aren’t dumb. There are reasons they have the pricing structures they do.

Some things to get out of the way:
1. No utility sells water. Water is free. What they sell is capacity and distribution. You are renting a length of pipe as water moves through it. The way to tell how much you bought is by measuring the amount of water, and that’s how they charge you. For your billing and behavior, this is just like charging you for water, so this is a minor technicality that makes no difference. It just bugs me to hear people saying to charge more for water, because I am hopelessly pedantic and literal minded.

2. It isn’t coincidence that the people you hear saying that pricing water is the bulk of the solution are all economists. A lot of the reasons pricing structures change slowly are over on the legal and institutional side; economists dismiss those as trivial, malleable impediments, but lawyers understand that they give districts a different set of incentives.

3. Rates ARE going up. Fast and hard this year.

4. The word “shortage” is doing some work that gets skipped over a lot. When everyone says “drought” and “shortage”, what we basically mean is “less then we’re used to”. We don’t mean, and won’t in the foreseeable future, “not enough to drink and bathe”. So far we’re not even close to that range. What we do mean is “not enough to use it like we’ve always been able to”, on lawns and embedded in our meat supply and on wasteful appliances and by deferring maintenance on leaky pipes.

Now here’s the thing. When laypeople hear No More Shortages, they think, ‘there’s plenty, I can continue hosing down my driveway just like I always have.’ When economists say No More Shortages, they mean charging so much for water that people cut out the uses they don’t want to pay for. Then supply curve intersects demand curve, and the economic definition of No Shortage is met! Yay! In real life, high price signals that cut out less-intensely-wanted uses means no lawns, fewer burgers, switching out appliances and replacing leaky pipes. That is what laypeople thought was a shortage! It is not the careless plenty they grew up with.

I am personally fine with this. I don’t have any emotional attachment to careless water management or lawns. I do want to point out, however, that when economists say No More Shortage, they are talking about what the broad public considers a shortage (less than I’m used to and I have to pay attention).

5. One of the standard critiques of markets is that since wealth is distributed unevenly, the marginal value of a dollar is different between rich and poor people. The rich will be able to afford their swampy lawns while the poor scrimp to drink. You can create pricing structures to alleviate this (a very low rate for the initial chunk of water, or refunds to low-income users), if environmental and social justice are important to you. Those are worth explicit consideration and decision.

All that out of the way, lets get to the good part. Why don’t districts pass the marginal costs of water on to their constituents?

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