What would happen if our demand for a commodity changed depending on how we used it?
Prices of goods are theoretically determined by where the cost of supply intersects with demand. And as you learn in ECON101 ideally this will lead to the efficient allocation of resources to the benefit of society. But if the demand for a single good could change depending how we used it how could prices respond efficiently? The answer it turns out is rather complex.
Water is exactly this type of niche commodity – maintaining entirely separate and yet crucial properties in its various uses; (1) as an essential nutrient for life, (2) as a factor in consumption and production, and (3) as a vital element in the earth’s ecological health. Within each of these properties there’s a huge difference in the size and relevance of their associated costs and benefits that are difficult to identify, evaluate and enact through policy.
It is no wonder therefore that significant economic literature exists regarding how to best value and accordingly allocate water. Considering each of these properties in turn goes a small way to reveal the complexity of this issue and the limits of economic policy to accommodate moral, commercial and environmental considerations:
(1) What’s the cost of water when we can’t live without it? As stated by the UN, “the human right to water is indispensable for leading a life in human dignity.” As a result when valuing it we must necessarily use a moral lens. In this regard significant attention is given to equitable allocation through the water entitlements and threshold tariffs, effectively subsidizing the use of water at a particular level. A notable example of this policy in action is South Africa’s Free Basic Water Policy implemented in 2001. Following WHO recommendations this policy operates to provide all citizens with access to 6 kiloliters of free water per month. Despite a lack of success thus far, the use of this policy represents shows that sometimes economics and pricing methods just shouldn’t be used – our moral duty to make water accessible overcomes our economic sense. To a lesser extent the block pricing method implemented in Australia portrays this same concept, with incremental price increases for water usage beyond block thresholds intended to allow for universal water accessibility.
(2) Consumptive and productive uses are the primary means by which water becomes a commercial good, encouraging prices to influence efficient allocation within the scope of agriculture or industry. In agricultural use water-users face the risk of the ‘tragedy of the commons’, an ecological concept made famous by American Garrett Hardin, whereby the self-interested behaviour of many agents have a negative impact by depleting some common resource. Over-exploitation of water usage in farming undoubtedly runs the risk of generating unsustainable processes and in Australia this has been tackled through the creation of a market for water trading. By institutionalizing water entitlements and allocations farmers can engage in an equitable market distribution that promotes greater allocative efficiency by enabling rights to be traded to more productive uses. However, water trading is not the only means of sustainable water allocation in agriculture. Across the world localized social collectives exist to address the issue of scarcity and equitable distribution. The Warabandi System of Pakistan and India, or the Subak system in Bali both relies on cultural values and communal action to protect water sources for irrigation purposes.
(3) The contribution of water to vital ecological flows has perhaps been given the least attention in the history of water policy, however recent developments in climate change and environmental consciousness has shifted the focus back to environmental considerations. The primary issue associated with this property, and inherently all environmental policy, is the degree to which we can analyse the benefits and costs to the environment of water extraction. In Australia water allocations to the environment has been a tool used to build ecological systems into the existing water trading scheme. An interesting perspective on this issue provided from this CSIRO report (2000) is with regard to the nature of the environment’s claim on water; does the environment have a presumptive right to water, or is it a competitive right incorporating a trade-off between economic, social and environmental objectives?
This is but a mere glimpse into the extensive literature that exists to explore, explain and inspire sustainable water practices, all of which are limited and none of which are exhaustive. The complex nature of water in its various functions renders pricing it incredibly complex and highly controversial. Implementing minimum water standards of water accessibility requires public investment, water trading promotes sustainable usage but understates the impact of agriculture on water quality, and the presumption that we might be able to tradeoff environmental risks for economic and social benefits reflects the fundamental way people still fail to understand our irreversible destruction of the ecosystem.
And yet when it comes down to it there is no artificial substitute for water – we need to work with what we’ve got.
Environmental Effectiveness and Economic Efficiency of Water Use in Agriculture: The Experience of and Lessons from the Australian Water Reform Programme – OECD Report (2010) Michael D. Young, The University Of Adelaide
Agricultural Water Pricing: Australia – OECD Report (2010) Seamus Parker –
Council Of Mayors (South-East Queensland), Robert Speed – Freelance Consultant
Approaches To Urban Water Pricing, Frontier Economics, Waterlines Occasional Paper No 7, July 2008 – National Water Commission
Externality Pricing In The Australian Water Sector, Frontier Economics, Waterlines Report Series No 43, April 2011- National Water Commission
Australian Government – National Water Market; ‘Water rights’, http://www.nationalwatermarket.gov.au/about/rights.html
Market-based Opportunities to Improve Environmental Flows: A Scoping Paper, Report to Environment Australia, Elizabeth Siebert, Doug Young and Mike Young, Policy and Economic Research Unit, CSIRO Land and Water, June 2000