Why districts are slow to charge market rates for water (2009)
onthepublicrecord.org
onthepublicrecord.org
Parking meters have a similar problem. The purpose is for drivers to pay their fair share to use some real estate in a city, however the city and elected officials in charge have a vested interest to keep prices low. Nobody wants to be the mayor known for raising parking rates.
Privatization makes some sense in this case since a private company can actually make the meters charge closer to what parking should cost. However, it ended up being a pretty bad deal for Chicago in the end.
I'm a centrist, but things like this push me further to the right personally. Governments can't charge what they ought to for parking/water and the people ultimately suffer the consequences.
Not saying dynamic pricing is not useful though.
I assume at some level that becomes effectively a tax on businesses though as some shoppers stay away on average (albeit making parking easier for others) while the government collects more revenue. (That said, in a lot of places, there probably isn't enough on-street metered parking to meet demand at any reasonable price.)
P1: Why don’t districts pass the marginal costs of water on to their constituents?
P2: HAH! Do you see what I did there? [switch constituents with customers]
Me: Actually, the thing I notice is the switch from "market costs" to marginal costs. It should be obvious that "market costs" are fiction for water districts since these districts are virtually always a monopoly charging the prices they choose.
On the other end of this, water districts are created by municipalities to foster the development of a town or city as a whole.
Sure, you can argue that "marginal costs" are the same as "market rates" but that's a long argument that makes the agenda involved much more clear.
I'd say in contrast, water fees are fundamentally taxes and so water districts are inherently supported by taxes and the talk are "market rate" is basically neoliberal ideology that aims to squeeze the average rate-payer/tax-payer in the name of "markets" but which doesn't actually use real markets.
That's not saying that municipal water districts shouldn't have fees to restrict usage - but they should be like other taxes, self-consciously charge people what's needed. The average person gets a low rate for what they need to consumer and the huge mansion pays a huge rate and appropriately so.
How could "market rate" mean anything for water?
Is the same "market rate" restaurants charge for fish sometime. Inside their restaurant they are the monopoly provider of fish to you and hence there's no market -- they're not competing with other restaurants in this moment. They are directly passing on cost of fish to you.
Actually, it's not. That would be the average costs. The marginal cost of a good is essentially the cost to add one more final user, which can be higher or lower that the average costs provider pays to supply all their customers.
The author mentions the marginal cost in particular because by some theories, that's the price that would develop in a competitive market. But it's just a fiction. There's no reason for municipalities to charge either of these prices. There might be a beautiful lake that could be cheaply drained to everyone's water but that may well be undesirable in many other ways.
See how eg the electric grid manages to have multiple suppliers for end users in many places around the world, despite there being only a single grid.
And, even with a single supplier only, you can still set market clearing rates. Those are not necessarily marginal rates.
(If you are worried about poor people: give them money.)
> The average person gets a low rate for what they need to consumer and the huge mansion pays a huge rate and appropriately so.
That's only 'appropriate' by fiat.
See how this system manages to be a fiction to support higher rates.
Utilities celebrate when they can service an address for less than a grand in their public filings. For coaxial TV service the cable company is often required to cover the first $4200 in build out costs to a given address here in the USA.
Running parallel infrastructure of the same type is very expensive and damages the cost model of both providers, as they are forever fighting for market share.
Open access to shared infrastructure can work for some types of infrastructure like internet, but water, sewer, gas and electric where real time need needs to always be met with quality supply otherwise the infrastructure is damaged permanently makes it impractical to have multiple operators pushing water, gas, or electrons into a shared grid.
Reseller models like what Texas has developed disintermediate the customer from their actual electric provider. It's just a legal fiction effectively.
Yes, and they should be treated as such - regulated according good policies.
Reseller models like what Texas has developed disintermediate the customer from their actual electric provider. It's just a legal fiction effectively.
Indeed, moreover, the Texas system got "interesting" in a not-good way during the huge blackout a couple years ago when charges jumped to a $1000+/hour for retail customers gambling on the raw market rate systems, (in my memory of the events).
I don't think the legal fiction helps anyone here but well connected scammers (remember Enron?).
Playing the lottery - small downside, huge (albeit improbable) upside. Buying wholesale power unhedged - small upside, huge downside, and not all that unlikely - in the last few years here, we’ve had several hundred year storms.
I joke, but only somewhat. This whole model is pretty clearly at least a bit broken. I don’t believe for a second that electricity cost $1k/kWh in any way that truly makes sense. Perhaps marginal electricity cost that much, but that’s a very different statement.
I wonder whether there is good research on market design for goods like electricity that are:
- Generated at a rate that is only weakly dependent on demand. (But may have expensive sources that will only operate when it’s economical to do so.)
- Are generated by very capital-intensive plants.
- Are mostly not storable. Taking delivery of electricity now and reselling later is expensive.
- Are needed by users in a mostly inelastic manner.
Cloud computing resources are similar. The “spot” electricity and cloud compute markets are a bit odd. They don’t work at all like spot commodities, many of which can be put in warehouses.
Marginal electricity is what people use at the margin.
There's a futures market for that. As a retail customer, you probably wouldn't want to use it directly. But companies can offer that as a service for you, and give you a long running contract that they hedge via the futures market.
To the retail customer that looks pretty much like a regular old contract, but with lighter regulation on prices on the backend.
Btw, my comment was meant in the sense that from the point of view of the market, one individual household's electricity consumption wouldn't move prices too much. Thus it's at the margin.
Plenty.
E.g. a well argued defense of the current energy-only marginal pricing model: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4087528
Or something different?: https://doi.org/10.1016/j.tej.2019.02.010
Thank you for this comment. The disingenuous invocation of "market rate" is the first thing that hit me about this article too. From most everyone's perspective, "market rate" implies a competitive market. But to a monopolist, it means the maximum amount of wealth they can extract from captive customers. eg the peak of the Laffer curve. Or in the world we're headed towards, surveillance driven fine grained price discrimination.
In this case, the government should choose the supply such that it's ecologically sustainable. So the price is the price at which that sustainable level of water usage is demanded by the market.
That would not count as monopoly pricing, which would instead set the price to maximize revenue
Water is limited. And water use above basic needs has clear economic value. Besides water is a commodity. Water should be one of the easiest things to price.
There is a base level of water each person needs. That is inelastic demand, and an abomination to price gouge. But most water usage isn't these basic needs. That makes it decently easy to protect these basic needs.
Individual citizen consumption has nothing to do with prices, and their average usage is meaningless.
States and large water rights ventures fight over all these, and farmers are extremely incentivized to keep growing anything year round to consume at or above but never below their water allocation and right.
I’m in Dallas. We have months long periods almost every year where all our lakes are so overfull, we’re simply dumping excess water down the Trinity River to Houston’s Lake Livingston, which during those periods is typically well over capacity, too.
There’s no reason to conserve during those times. Want to grow a rain forest? Go for it! Conservation pricing is silly then.
Same for New Orleans. All that city has to do is put a straw in the Mississippi. There’s no conceivable situation where conservation is needed there.
Sure, there’s could be other limiters, like capacity to process and generate water. But that’s not a conservation issue.
Just like electricity often has different prices during different parts of the day?
Did I miss anything?
Why does punishing wasteful users require charging them more per unit? If I waste a lot of milk, like by bathing in it, I'm punished by having spent way more on milk than a normal person. "Use twice as much, spend twice as much" is fair.
On the other hand, if water is so scarce that you need to discourage people from using a bit extra, why do you price it so cheap in the first place?
Everyone needs water to live. The actual price of water, fairly pricing in long term externalities, may be too much for a family of four to afford their 8 or 10 kgals a month. At least for many such families.
But when you price it at the marginal cost to pump out the extra gallon, it becomes economical to do silly stuff like grow water intensive crops in the desert and draw the city's aquifer down.
Hence the conundrum. Price it fair, some people can't afford flush the toilet. Subsidize it at a flat(ish) rate, or even just ignore externalities, some people can afford to destroy the commons. So, conservation pricing.
Depends on where you live. And perhaps we shouldn't encourage people to live in such dry areas where an honest pricing of water would make living unaffordable?
> But when you price it at the marginal cost to pump out the extra gallon, it becomes economical to do silly stuff like grow water intensive crops in the desert and draw the city's aquifer down.
Your pricing should take the longer term into account. An auction style pricing can do that. (Or a system that simulates auction-style pricing. No need to go through all the hassle of actually holding auctions.)
> Hence the conundrum. Price it fair, some people can't afford flush the toilet. Subsidize it at a flat(ish) rate, or even just ignore externalities, some people can afford to destroy the commons. So, conservation pricing.
That sounds like your conclusion is driving your argument.
Give poor people money, if you want to help them. Instead of mucking around with prices.
They can then use the money to either pay for water or move somewhere less inhospitable. Or spend it on something they like even more than either of these two alternatives.
Btw, flushing toilets with drinking-quality water sounds like a big waste. You should only do that when you have plenty of water to go around. Perhaps that family wants to buy a composting toilet, and pocket the savings? Instead of flushing water down the drain every day?
This is a really big aspect of it, and "save water" applied without thought can be counter-productive.
Where I live, the water comes out of the ground in wells, goes through the system, and leeches back into the ground in a giant septic system (that they call the wastewater treatment plant). It's pretty well contained and as long as we are nowhere near the limit the main thing sewer/water is paying for is maintenance of the system.
That is NOT the case everywhere in the USA, especially the states where water is piped in from miles and miles away.
I do agree that much of the problems we have is forcing public utilities (water, power, transit) to ALSO be social programs; this dual-goal always ends up messing things up.
Amen to that. Not only public utilities, but also employers and stores etc.
Giving (poor) people money should be the default. Everything else should require careful justification.
Not because of anything directly in the economics, but because people have really weird ideas and emotional attachments. So instead of charging a market rate proportional to usage (plus a fee to access the network etc, and giving poor people money to afford all this), there's all kinds of weirdness and grandstanding.
See https://slatestarcodex.com/2013/08/25/fake-consensualism/ for a wider exploration of sacred value and taboo trade-offs.
People seem to prefer having the government snoop on and micromanage what you use your water for, eg watering your lawn or filling your pool, instead of charging people a reasonable rate like you suggest.
Farmers at least should know they have to operate in a market, with all kinds of conditionality on interrupting flow, capture of water which falls over their land (but is not entirely theirs to keep, because they are in a catchment for a water supply for other people) -And the same with bore water: there's no extraction without impacting somebody else, unless you're in a very unusual position: ground water is another shared commons.
Reticulated water in domestic contexts? Sure. A lot of people don't understand the social and economic pressures. Down here in Australia, with 10+ year droughts across large metro areas recent history and investment in desalination plants, we have a very good idea of the limits to domestic water usage which can be required of us. The farmers in NSW are at war with themselves and riverine management processes around retention of water flows over land, in the streams.
For the rest of the community, it doesn't matter whether you water you fill your swimming pool or flush the toilet a few extra times. Or does it?
So you will still end up with rich people watering their lawns, but people with less income will have to suffer. I think this is better handled through heavy taxation and outright bans rather than trying to get an already finicky thing like a market to solve it.
Tweaking the market and exemptions might be difficult and finicky. But managing taxation and outright bans is even more finicky.
I am not, btw, arguing for an electricity like system of daily auctions. Just for a 2-tier pricing system that covers the basic requirements with a low rate, and sets a roughly 'market clearing price' for the remainder.
For this I would also price untreated water quite a bit higher. The price isn't just set for the cost of extraction. It is mainly set for the opportunity costs of all others who cannot use that water. So untreated water should cost roughly the same.
So if your water requires more pumping distance and elevation, and the more piping's involved, the more you pay.
https://www.clevelandwater.com/customer-service/water-rates/...
We shouldn't be selling water at whatever the market will bear, but whatever the cost is to produce clean water (or less). Whatever amount prevents waste but allows everyone access to clean, potable water should be the what is charged.
Running out of water is horrible, so it needs to be prevented. Using prices to signal scarcity is generally the least worst solution. In other words, you shouldn't just pay the cost of extraction, but also some of the opportunity cost of everyone else not being able to use your water.