Pay For It
Wednesday, June 25, 2008
Many of the world’s poor don’t get good water because they don’t live near a piped water connection. Or if they have a connection, it is often bad and irregular, with backflow putting dangerous and dirty substances into the drinking water. The underlying problem is that many governments artificially hold down the price of water, or they won’t let water companies cut off nonpaying customers. The result is that water companies don’t want to serve these poor customers in the first place, and they certainly don’t want to spend money by adding more water connections for the poorer areas.
Deregulation would give water companies a stronger monetary incentive to serve these customers. For starters, an unregulated private monopoly would try to bring as many buyers into the system as possible, so as to make as much money as possible.
Of course deregulated monopolies are bad, mostly because monopolies raise market prices and not everyone can afford the higher rates. But for all the problems deregulation can bring, the status quo seems much worse. And it’s worth asking what these higher prices are relative to. Carrying water on your head costs much more–in terms of both money and effort–than piped water. If you’re a poor person, wouldn’t you rather face a private monopolist, selling you water through pipes, than not have any water company at all? Whether we like it or not, those are the real world alternatives.
The sad truth is that hundreds of millions of people in poor countries just don’t get enough water. It’s common in these countries for women to walk miles–carrying heavy buckets or balancing them on their heads–just to bring water back to the house. Many Third World cities have uneven rates of water coverage, often serving less than half the population.
Carried water isn’t just a pain. It’s expensive, costing between five and 20 times more than piped water. That extra expense really matters if you are living on a few dollars a day, and it doesn’t include the very real costs of time and effort, not to mention frustration. Many times the small amounts of water that are carried to the house are quickly exhausted by the needs of bathing, cooking and cleaning, and then someone–usually the woman of the house–has to go back for more.
Even worse, these water sources are often dirty and carry disease. Each year hundreds of thousands of children die from diarrhea, and many of them got it from drinking bad water. Often the diarrhea becomes fatal because the children don’t have clean enough drinking water to keep themselves hydrated. Currently, dirty water is killing more people than AIDS. Water policy is not a sexy topic, and it doesn’t receive a lot of attention, but bad water is one of the world’s biggest problems.
I’d like to suggest a radical idea. The solution for the poorer parts of the Third World is deregulation of the market for piped water, combined with the enforcement of property rights. Yes, I’m saying that Third World governments should consider letting private companies sell water at any price they want. This includes giving them the right to cut off people who don’t–or can’t–pay their bills.
And no, I don’t mean a water concession with a price regulated by the government, I mean true laissez faire in water supply. No price regulation, no rate of return regulation, no government ownership of assets, no political pressure to keep prices low. Water companies should be allowed to maximize their profits, and because supplying water is nearly always a monopoly, they should be allowed to make monopoly profits. I know the idea sounds crazy–to an economist, water supply is a classic “natural” monopoly–but on closer inspection the other alternatives might be worse.
Many of the world’s poor don’t get good water because they don’t live near a piped water connection. Or if they have a connection, it is often bad and irregular, with backflow putting dangerous and dirty substances into the drinking water. The underlying problem is that many governments artificially hold down the price of water, or they won’t let water companies cut off nonpaying customers. The result is that water companies don’t want to serve these poor customers in the first place, and they certainly don’t want to spend money by adding more water connections for the poorer areas.
Deregulation would give water companies a stronger monetary incentive to serve these customers. For starters, an unregulated private monopoly would try to bring as many buyers into the system as possible, so as to make as much money as possible.
Of course deregulated monopolies are bad, mostly because monopolies raise market prices and not everyone can afford the higher rates. But for all the problems deregulation can bring, the status quo seems much worse. And it’s worth asking what these higher prices are relative to. Carrying water on your head costs much more–in terms of both money and effort–than piped water. If you’re a poor person, wouldn’t you rather face a private monopolist, selling you water through pipes, than not have any water company at all? Whether we like it or not, those are the real world alternatives.
If complete deregulation is too radical for you, consider the interesting compromise proposed by the economist Jeffrey Sachs, currently heading the Earth Institute at Columbia University. He suggests that the private company be allowed to charge high prices, but only under the condition that it allocates a minimum amount of water for everyone, either for free or at a much lower price. Basic water needs would be met, and the company still might make a profit.
That said, I’m less worried about high prices than Sachs. Let’s say the new water prices were so high as to capture all the benefits that buyers would receive from the new supply of water. We can expect much lower rates of diarrhea and other diseases, if only because the water supplier can charge more for cleaner and safer water. The resulting decline in disease means that children will die less frequently and adults will be healthier and more energetic. Those long-term social benefits are of enormous help to poor communities, even if high prices take away many of the initial, upfront benefits of the new water supply. In other words, we should consider radical privatization precisely because water is a public good and because clean water is so important for long-run economic growth.
Of course creating and maintaining these new water connections isn’t easy. Even with deregulation, many companies still won’t be interested in serving the poorest elements of their societies because they can’t charge poor customers a lot of money. They might not be able to charge enough to cover the costs of billing, much less the cost of laying down the pipes. But the more weight that point carries, the weaker the case for doing nothing and weaker still for regulating water prices. We already know that with artificially low, regulated prices the poor get no water; with a private market they at least have a chance. Governments need to be doing everything possible to encourage piped water supply, and that means allowing high prices.
Sachs recently called for increasing United Nations water subsidies by a factor of at least 100. No matter what one thinks of the U.N., or that plan, it’s safe to say it isn’t going to happen. Wealthy countries simply don’t want to spend the money. Maybe that’s unjust, but it’s a fact.
Water deregulation, in contrast, wouldn’t involve much in the way of upfront expenditure. It wouldn’t require the U.N. Some poor countries could experiment with the idea while others waited and observed.
The real question is, What do we have to lose? Let’s try some water deregulation and hope that at least a few million people can take those buckets off their heads and trade them in for the pleasure of paying a monthly water bill.
