Water shortages are created by an abundance of government rein

Figure 1: Total Volume of Water in “Melbourne Water” Storages

I like Chris Brown’s critical thinking (Chris is at the Australian Graduate School of Entrepreneurship at Swinburne University). How can you resist essays with the encapsulation of an idea as succinct as the caption of this post? The target Chris Brown post is on the topic of water economics — the context is Australian misadventures in governance, but the principles are the same everywhere.

It is near impossible to imagine any private company not enjoying the “problem” of high demand for its products and services. Yet there are some products that are repeatedly reported as shortages. There is one thing these products have in common: government intervention, typically in the form of price controls.

This is especially the case with water in Melbourne, Australia, and has been for at least a decade. While supply of water is in many ways a complex issue, understanding economic shortages is not.

The government has blamed the shortage of water on drought and climate change. And while droughts may be created by a shortage of water, water shortages are created by an abundance of government rein. Despite almost yearly decreases in water storages in Melbourne (see figure 1), real prices have not increased significantly. And currently the “Essential Services Commission” will be setting prices for the next five-year period. This means, regardless of supply or any number of variables and uncertainty, (real) prices will remain roughly the same for five years. In other words, expect continued shortages.

Instead of economical pricing there is political pricing, where pressure groups and special interests are given “rights” to use water during droughts, and at subsidized pricing. Businesses are able to use water for irrigation in the name of boosting GDP, while individuals are asked (or forced) to consume less and less. Government as the friend of the little guy is simply a myth.

Of course one may argue that water is a scarce resource, and, therefore, naturally there may be shortages. Yet all resources are scarce; water is no different from wheat or copper in this respect. Shortages do not exist in a free market because of the price system, including the profit-and-loss mechanism.

Most of the essentials of a water market are covered, so do read the whole thing. And thanks to U.C. Berkeley economist David Zetland for the link. I agree with David’s caveat on privatization:

I recommend the whole thing with one caveat: I do NOT think that water needs to be privatized to create the proper incentives for conservation, since private monopolies can be just as inefficient as public ones. What’s needed is better community control of water — so that it’s used to maximize total welfare.