Since You Asked

The ban on hosepipes does not hold water

“Thames Water, Britain’s biggest supplier with 8.8m customers, is among seven companies introducing “temporary use bans” from April 5, after one of the driest two-year periods in southern and eastern England since records began.”

Financial Times, March 12

Hosepipe bans again?
That’s broadly the spirit of it, although what is banned varies from place to place.

But it was chucking down with rain this week. It was snowing, too. How can we be talking about drought?

Water isn’t like electricity: it can be stored, within limits. You don’t get a water shortage if you have a dry week and you don’t cure a water shortage with a few April showers. You get water shortages after a couple of years of low rainfall.

And how do you cure water shortages?

Hosepipe bans, apparently.

Is that a good idea?

Probably not. It’s appealing for the water companies because the revenue they receive is capped by the regulator. They can’t make more money by supplying as much water as possible to as many joyful customers as they can reach. It’s easier to just yell at customers to stop watering their lawns. It might be annoying but the water companies don’t lose much as a result.

No doubt you have a better idea.

The basic problem is this: for any particular household, there’s no obvious cost difference between the water you use to flush your toilet and the water you use to irrigate your garden. The sewage and waste water costs might be different, I’ll admit, but basically water is water. A hosepipe ban arbitrarily says that you can flush your toilet as often as you like and never pay an extra penny, but watering your lawn is punishable by a substantial fine. But there are lots of ways to save water: why should some count and some not?

You’re not suggesting a “flushing the toilet ban”?

I am not suggesting any kind of ban. It’s the idea of the ban that’s problematic. A new article by economists Jeremy Bulow and Paul Klemperer analyses the advantages to consumers of rationing schemes rather than simply raising the marginal price. The bottom line: the advantages are typically illusory. Rationing reduces supply, relative to what could be provided if prices were higher. It also misallocates resources – there’s no reason to expect that the people who get the scarce product are the ones who value it most. And rationing encourages all kinds of fun and games to try to get around the rules.

So you just want water to become more expensive.

I hope water will become cheaper, on average. But I certainly want it to be expensive to use lots of water at a time of shortage. We want everyone to have an incentive to save some water and the obvious way to do this is through water metering.

But what about poor households with large families who have to wash a lot of clothes and flush a lot of toilets?

Such families might also consume more energy and more food, but that is hardly a case for ordering Tesco to offer a flat price for unlimited food. The financial and environmental costs of unmetered water are very real. In any case, water companies could offer cheap rates for the first few dozen litres a day and then raise rates. This would make “some water” cheap and “lots of water” expensive.

Well, why not – but then again, why?

Because the alternative is a system built to cope with all the water we can waste, no matter what the weather. And that’s madness.

I’m convinced, I think.

You’re not the only one to be convinced. About 40 per cent of households already have water meters. The next step may be for seasonal pricing to become more widespread. The basic idea is not to make people pay more for water in total, but to make them pay more for the litres of water that are particularly difficult to provide. That should reduce the overall cost of water, as well as the environmental impact of supplying it.

It still makes me feel uneasy – water is one of life’s essentials.

The economist Al Roth has written about “repugnant markets”, where people feel uncomfortable about the use of market mechanisms to allocate resources. Examples are markets for spare kidneys, sex and the right to water the croquet lawn at your country pile. I think we need to get past the icky feeling and figure out when our moral sentiments are telling us something important and when they’re merely a costly affectation.

Also published at ft.com.

7th of April, 2012Since You Asked • Comments off