Water and economics

LINE & LENGTH

The basic problem, it seems to me, is that there isn't even an intuitive, let alone a formal, understanding of the principles of the most elementary economics.  For instance, in spite of some valiant efforts by the economists from the World Bank, it proved impossibly hard to establish the connection between scarcity and price.

Very few of those present seemed to understand that water, even though produced naturally, is nevertheless scarce except for those living close to its source of supply. The fact that scarcity increases with distance from the source was simply ignored.

Not just that. Most speakers, coming from different aspects of the water business, insisted on describing it as a public good because it is essential to life.  It followed they said that it should be provided at a negligible price, especially to the poor.

The truth, of course, is that water is not a public good at all because unless you happen to be living at the source of supply (say, a river bank or a perennial pond) consumers use water only at the expense of each other. That is, if the rich consume more, it necessarily means less for the poor. And vice versa.

In contrast public goods are those goods that can be consumed by everyone without diminishing the supply for someone else. Defence, air, justice etc are such goods because the marginal cost of producing one more unit of any of them is zero.

Nor did the speakers appear to understand that if water cannot be brought to the consumer, the consumer has to fetch it. This work is mostly done by owned labour, which are the women and the girls in the family.

If they were to charge a price for their labour and given that they can only carry a few litres at a time, the per litre cost would be at least ten times the rate that people seem willing to pay for piped water.  That is, people are already paying a price in terms of time and effort and that price is far more than anyone can imagine.

The issue of whether the poor can pay for water kept coming up in this context, regardless of the fact that they are already paying for it in time and effort. And then someone came up with the distinction between the ability to pay and the willingness to pay, thus adding a moral dimension to a purely economic issue.

The civil servants who spoke did not also seem to understand that price charged per unit should fall with the volume of purchases. They kept muddying the issue by talking in terms of political categories, namely, the rich and the poor instead of consumers with different levels of demand.

As an aside, I might add that even phone calls in India are not charged on this basis. Here, the more you call the more you pay per call, which means that BSNL has never heard of bulk discounts that serve to increase sales even at a lower per unit price.

But what if something is scarce, like water, someone asked. Should not a premium be charged beyond a certain level of consumption, be it phone calls or water?

I tried to explain that this was the classic demand management approach so dear to governments whereas the solution lay in increasing supply as the private sector favours. But to no avail. Nor did I cut much ice when I said that supply is a function of investment and that investment is a function of returns, which, in turn, is a function of the price chargeable to the consumer. Instead of trying to understand the logic of these things, most of the speakers were happy to dismiss it as a "World Bank conspiracy".

There was also some discussion of crops that are water intensive. But the suggestion that if water were not so cheap, several of these crops would not be produced on marginal lands was ignored.

So great was the ignorance that someone even compared the notion of privatising water supply to the Enron-MSEB fiasco. This was in response to a question about why water supply could not be unbundled into a wholesale market and a retail market.

After all, if it can be done for electricity, why can't it be done for water? Both exhibit nearly identical characteristics as far as the business part is concerned.

It is difficult to see how, in such an ocean of confusion and ignorance reform can make any headway.  Nothing exemplified this more than the insistence by one speaker that efficiency, which is the cornerstone of economics, flows from equity rather than it being the other way round "" in spite of the huge evidence to the contrary.