The commodity of water is unquestionably crucial to sustaining human life.
Many humanitarians suggest that it is a basic human right that should not be subject to market pricing. However, market pricing serves a crucial role in bridging the information asymmetry between the consumer and supplier. Operating as a quantifiable signal to the consumer indicates the supply of a good or service. While the moral concern of safe drinking water for the poor is a valid consideration, distortions in the price may lead to other unintended consequences (p.228).If the equilibrium price of water is relatively high by the estimates of the consumer this could be an indication of a low water supply. Making pricing mechanisms the prime instrument for curtailing water shortages during a drought. Some pundits would find the idea of placing a premium on the water to be ethically objectionable. Not allowing water prices to rise to market levels may result in dwindling supplies of potable water. Potentially impeding any sincere conservation initiatives making these moral concerns somewhat inconsequential. If all the aquifers, reservoirs, rivers, and tributaries are dried up no one regardless of socio-economic status will have access to water.
Per the book Aquanomics, as of 2012, the state of Utah was the second-largest consumer of water in the western United States. Ironically, Utah also had some of the lowest prices in the region (p.225-226). Part of the reason why the cost of water is so low in Utah is related to the fact that water districts in the states are subsidized by ad valorem taxes. Property taxes have proven to be a “reliable” source of funding for various water projects and regular maintenance in the state of Utah(p.226). Due to water services being supplement by property taxes the connection between the cost of water and consumption has been severed (p.228).
Misaligning incentives away from conservation and making excessive use incentive to the price of water. Whereas if customers were directly billed for water usage based on consumption volumes, people would be more cautious about their overall consumption. As the water supply decreases, naturally the price would rise to make it a built-in mechanism to combat shortages.
Unfortunately, there are several objections to charging customers for water based on consumption. One of the more perplexing arguments against directly billing customers for water services is that it would result in wasting water. Predicated upon a prima facie application of basic economics would assume that higher costs of water usage would incentivize more conservative consumption. Never the less this is a common objection against deriving all revenue from directly billing based upon water consumption. As one could predict that when the price of water increases the demand for water decreases. So what happens to the excess water that is left unconsumed due to the higher prices? In the state of Utah, unused water tends to be stored in “..reservoirs, lakes, and groundwater aquifers until filled..” (p.230). Demonstrating that the assertion that the excess water would be wasted is inconclusive (p.230).
Despite concerns of water being wasted due to allowing the cost of consumption to rise to market levels, there is a great irony in this justification. Even in a system where the cost of water is subsidized the water districts in the state of Utah still face surpluses (p.231). Considering the long duration of time it takes to appropriate water from new sources and that “… new water comes in lump quantities, supply and demand are seldom equated in the same year..” (p.231). Excess supplies will remain until population and industrial growth drive demand towards the water supply (p.231). Meaning that there will excess water supplies until demand reaches the equilibrium point. Single-handedly invalidating this justification for continual subsidizing, the water in the state of Utah. It has even been found that demand for water increases in lockstep with the rise in per capita household income (p.231). This fact only further serves to validate the point that with development the demand for water increases. Per capita income will not increase until more jobs come to a specific geographic area. This tends to be correlated with the development of infrastructure. Displaying the integral relationship between the demand for water and urbanization.
One variable that is outside of the realm of human economic behavior that can influence the water supply is participation. Regardless if more development occurs throughout the water districts of Utah, no one can control weather patterns
(p.231). Should customers be locked into a flat rate in years where there is a large amount of rainfall? Vice versa in a year with scant precipitation is it reasonable to charge the same amount as a year with abundant rainfall? Anyone familiar with the underlying principle behind the Law of Supply and Demand would be baffled by this logic. Could easily speculate how the water supply could become distorted by such a flawed approach to pricing. Providing credence to the approach of utilizing market-style pricing to the provision of municipal water. Market pricing mechanisms provide a degree of flexibility based upon environmental conditions (p.231). This provides a rational approach to the allocation of water and would most likely not lead to the shortages projected by many critics.