More Economic Nonsense from League Commenters

From commenter Francis:

Free markets are good for allocating certain kinds of goods, but terrible at others. Potable water, for one.

Oh, really?

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About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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22 Responses to More Economic Nonsense from League Commenters

  1. D. C. Sessions says:

    Yes, there are free markets for potable water. How well they work is not in evidence.

  2. James Hanley says:

    D.C.,

    Do you have evidence of market failure in the market for potable water?

  3. James Hanley says:

    Addendum: I’ve looked at water policy a fair amount. What I see is most people assuming markets for water can’t work, because water is a necessity of life. But of course food, clothing, and shelter are also necessities, and markets work quite well for those for the most part, with some public policy filling in at the bottom end.

    But with water we see a lot of policy-based water distribution, which are generally very badly designed. Almost no water utility company, perhaps none, actually shows you your costs as you’re consuming, which creates a disconnect between cost and benefit that leads to overconsumption. And water is often distributed on a political basis in a way that is both environmentally and economically perverse, such as subsidizing up to 90% of the water cost for California farmers, dividing the Colorado River up based on political, rather than economic, demand, etc.

    But markets? Nah, couldn’t possibly work as well for water as they do for other things. We don’t need to investigate that–we can take it as a matter of faith, right?

  4. Matty says:

    I have a suspicion that part of what is behind the claim is the familliar confusion between ‘free market’ and ‘business interests’. I once worked for a water company (no names) that had been privatised many years before. What this meant was that a privately owned business ran the water infrastructure, billing etc while a government agency told them how much to charge and another government agency told them how to spend, what to upgrade etc*, while the regulations ensured they had a monopoly in their region**. From the inside this looked like a way to obscure government support for a particular set of investors but from the outside I can understand people concluding – “they privatised and then raised prices so more private involvement would mean even higher prices”.

    *In fairness our rivers are now cleaner than in a century so I’m not saying the spending was in the wrong place only that none of the outcomes good or bad can fairly be attributed to a market.

    **For added irony despite guaranteed customers and mandated profit margins they were heavily in debt and I don’t think they broke even in my two years there.

  5. D. C. Sessions says:

    A competitive market for water by the bottle is quite common in history, but it has a hard time competing with piped-in water both on cost and on utility (fire, sewer, etc.) except as a luxury addition.

    Competitive markets for piped-in water have the usual “natural monopoly” problem with high fixed costs and barriers to entry. The only instance I know of of an unregulated piped delivery was in Argentina, and it worked out about as skeptics predicted.

    Having exhausted my meager knowledge of the subject, I’ll now sit back and see what I can learn.

  6. DensityDuck says:

    The issue is that whenever you say “free market”, you introduce the possibility–however oblique, however end-of-the-ad-absurdum-argument–that someone will die because they can’t afford to pay for water. Because, if you have to pay, then there’s the possiblity that someone exists who can’t pay.

  7. D. C. Sessions says:

    The issue is that whenever you say “free market”, you introduce the possibility–however oblique, however end-of-the-ad-absurdum-argument–that someone will die because they can’t afford to pay for water.

    Possible, but there are solutions to that one.

    The arguably more serious issue is that markets aren’t frictionless, and incorporating market pricing into a system imposes transaction costs (see Coase.) In extreme cases [1] the costs of charging for a good totally dominate the market price of the good. A lovely example today is the market for bits: music and software being two examples. In both cases the cost of charging for the bits (with some exceptions) is orders of magnitude greater than the marginal cost of producing them even including amortized NRE.

    Now, a dollar a liter for drinking water isn’t going to break the budget for most Americans — thus the popularity of bottled water (including stuff with sugar and flavorings) up and down the SES scale. However, very few are going to want to flush their toilets with dollar-per-liter water. Which imposes externalities that complicate matters.

    [1] Imagine an “air market” for a silly example.

  8. James Hanley says:

    very few are going to want to flush their toilets with dollar-per-liter water. Which imposes externalities that complicate matters.

    I doubt it. It’s still easier than crossing over into my neighbor’s yard to shit in his swimming pool.

    Better metering of water would show people how much they’re using. Unless the water in the area happens to be very plentiful and therefore cheap people are likely to pay more attention to how much they use, without the necessity of government regulation. I’d encourage my kids not to flush if they just peed, for example, and I’d probably finally decide it was worthwhile to buy that low-flush toilet I keep thinking I should probably buy. As for my daughters’ 20 minute showers…I’d probably invest in a timed shut-off valve. I just don’t see the drawback of better metering information for water use–as I said above, disconnecting the costs from the benefits, so that we feel the benefits but not the costs, encourages over-use. And most people think overuse of water is a fairly important issue these days.

    As to markets, natural monopolies don’t necessarily prohibit using market forces. Government could put out competitive bid contracts for running local water systems, as they do for many services.

    And in some places it might be possible to run purely competitive water supply systems as we do competitive power systems. Each person buys from their supplier, who puts an appropriate amount into the system. There are technological issues associated with that, but it’s not inherently impossible.

  9. James Hanley says:

    Re: Air markets.

    Air is effectively a public good. Water’s not, so they’re not directly comparable.

    And which Coase article are you referring to? If it’s The Problem of Social Cost, I’m not sure you’re reading him right (although it’s been over a decade since I read it, so perhaps I’m misremembering part of it).

  10. D. C. Sessions says:

    Market and Firm — I’m looking at transaction costs.

    The cost of collecting on a good at some point makes for serious inefficiencies, which is one reason why the 20th century got so far from Smith’s large-N market model.

  11. James Hanley says:

    The cost of collecting on a good at some point makes for serious inefficiencies

    Theoretically, yes. But I still don’t see it for water. With air, nobody’s building pipes to pump it directly in my house (thank god). But they’ve already done that with water, and they’re already metering it (in most places), so putting a little gizmo in my house that shows how much each flush and show costs me just isn’t a big technological step. That technology doesn’t even need to be invented, just applied, and at a pretty darn low cost. The political difficulty dwarfs the economic difficulty.

  12. D. C. Sessions says:

    With air, nobody’s building pipes to pump it directly in my house (thank god). But they’ve already done that with water, and they’re already metering it

    But that’s not a market — you’re at the end of a monopoly pipeline. If you don’t like the water service you have, you’re stuck paying the rates to have it delivered by some other means. Alternately, you’re going to have to have someone lay pipe from the a Competitive Treatment Facility. There’s some major inefficiency there, not to mention barriers to entry and mondo business risk.

    Which might explain why we don’t see much in the way of competitive water delivery markets.

  13. James K says:

    DC Sessions:
    You’re right that some goods have overly high transaction costs to justify a market. However I don’t beleive this is true in water’s case. There are many countries in which water is metered on a per-unit basis.

  14. James Hanley says:

    D.C.,

    I explained two ways a more competitive water market might work, and you ignored them both. One was to have the local municipality have competitive bids for management of the utility, as municipalities do for trash hauling and other services. (There are, in fact, private water companies out there, but I’m not sure how much competitive bidding is going on, as opposed to direct regulation of prices.) The other, perhaps slightly far-fetched, was to run it as we run electricity markets, with the suppliers people contract with dumping their contracted for amount into a common distribution system, so that we don’t have to lay lots of extra pipes (some, to get it to the common distribution system, but not a maze of pipes running every which way across or under our city streets). I might also note that’s effectively how land-line long distance service is run (or was–does anybody actually do that anymore?).

    But beyond that, I think you’re still missing the point. Let’s assume there’s not going to be a true market in water, and that it’s going to be provided by a monopoly. And let’s assume that monopoly is what we normally have nowadays–a municipality-run system; a local cooperative; or a regulated private monopoly. In each of those cases consumers are at the end of the monopoly pipeline. But by metering the water use, they have greater ability to control how much they pay. They would then have incentive to reduce their use. That would also have the benefit of being good for the environment.

  15. Matty says:

    My water is metered and I’d agree this is a good thing independent of who supplies it.

    With regards to your suggestions I like the analogy to electricty and landline markets but those depend on a very large scale distribution network to make it practical for separately owned power stations or exchanges to feed in to the network. I suspect this would be harder to achieve with water, which as I understand it tends to have separate networks for different populated areas. To give an example, suppose we have a town getting all the water it wants from a reservoir and pipe system owned by the town council. We now decide to open up the market but what are new entrants to do? If they dig their own reservoir its unlikely they are going to get enough customers to make it worth their while as the town only needs one reservoir and they can’t sell the surplus elsewhere without laying a lot of new pipework. Maybe there should be a push for larger distribution networks, although this would have its own problems.

  16. ppnl says:

    One thing about water is that it isn’t a constant. Most years there is plenty here but every few decades you have major shortages. It isn’t in the sellers interest to promote efficient usage in the good years.

    Also water is a regional asset that usually needs to be developed to efficiently serve a regional economy. If you don’t have a regional plan you are pretty much screwed.

  17. James Hanley says:

    Most years there is plenty here but every few decades you have major shortages. It isn’t in the sellers interest to promote efficient usage in the good years.

    I don’t think that logic is correct unless you’re taking water from non-impounded surface sources, like natural lakes and streams. If you’re taking the water from either a reservoir or an aquifer, where it can be stored across years, then promoting efficient usage in good years seems rational to me.

  18. ppnl says:

    If the reservoir is full then what interest is there in efficiency? And the reservoir is almost always full. In fact we get a lot of our electricity from hydroelectric power we get from preventing the reservoir from over filling. The availability of water in the many good years can cause bad practices that kill you in the few bad years. But if your only interest is in selling water at what the market will bear you don’t really care about any of that.

  19. D. C. Sessions says:

    I think we’re getting away from “market for water” because all of the above discussion relates to the party with water (or its distribution) commanding prices in the absence of market forces.

    However, that said:

    The availability of water in the many good years can cause bad practices that kill you in the few bad years.

    Sometimes literally. The Salt River Project, which supplies a lot of the water for home and agricultural use in central Arizona, ran into a bit of a charter issue back in the 70s. Their charter required them to conserve water in reservoirs (Roosevelt, Apache, Canyon, and Saguaro lakes) for productive use. As a result, their dams had relatively modest spillways and their operating policies required them to avoid releases into the Salt River channel downstream of the reservoirs to the extent possible.

    In the mid-70s, there was a drought that had Roosevelt down to where you could see rocks at the base of the dam in September 1976. The winter of 1977-1978 was very wet, burying the high country in snowpack. Trouble was, March of 1978 brought a warm wet storm that melted all of the snowpack pretty much at once. The Salt River lakes filled up from nearly empty to brimming in short order, and despite running the spillways at capacity (under emergency orders by the Governor) the water was within feet of running over the top of Roosevelt Dam.

    A good bit of the Phoenix metro area came within literally a few feet of a Jonestown scenario, with the collapse of Roosevelt sending a wall of water down the Salt River canyon and taking out the dams below it. Since I was living within a mile of the riverbed at the time, this got more than a bit personal.

    Rather OT, but as long as you’re describing water use policies I figured you might get a kick out of a dramatic “negative externality” account.

  20. D. C. Sessions says:

    s/Jonestown/Johnstown/

  21. James Hanley says:

    s/Jonestown/Johnstown/

    Ah, I was imagining all the residents of Phoenix drinking the special kool-aid and thinking, “what’s the problem?” (*grin*)

    As to reservoirs, there are counterexamples of course, but years of persistent drought in some regions that we now perhaps finally understand are subject to persistent drought does provide an incentive to not draw down your reservoirs too much.

    And if we were funding the damn things through metered user fees instead of taxes, I wouldn’t be surprised if we saw smaller, more efficient, reservoirs instead of Glen Canyon style ones.

    As to power supply, it does provide an incentive not to reserve strictly reserve all the water for the future, but now we’re talking about an additional profit center from the reservoir, so it’s not about having an incentive to waste water rather than conserve it. Conversely, recreational uses can provide an incentive to reserve water during the good years so that the reservoir’s high enough during the dry years–or would be if the recreational use concessions were better integrated into the decision-making of the reservoir managers, which is rarely the case.

  22. D. C. Sessions says:

    And if we were funding the damn things through metered user fees instead of taxes, I wouldn’t be surprised if we saw smaller, more efficient, reservoirs instead of Glen Canyon style ones.

    SRP water use is metered. SRP has no authority to levy taxes; it was originally financed by issuing bonds against the property in the area (back when Teddy was President, as it happens.) SRP also sells electricity, BTW.

    No charge for recreational use [1], for the rather simple reason that the lakes are too big to make restricting access economical (see, I got back to transaction costs again!)

    The flood-control modifications to the dams were funded by taxes, and IMHO that’s about the only way to reasonably do it. Externalities again, no?

    [1] Marinas and such are different, and pay rent.

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