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The next Canterbury crisis

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economics

Water at what price?

After growing at 2.5 percent per annum during the past decade, Canterbury was shattered by two large earthquakes in relatively quick succession. This is a heartbreaking event for the region, and one that deserves the utmost attention right now. However, there is another disaster on the horizon if the region doesn’t act soon: the depletion of the region’s water resources. To stave off this crisis, a price on water needs to be introduced as soon as possible.

A major transformation in the Canterbury economy in recent years has been a rise in dairy farming—a very water-intensive form of production. However, a farmer’s individual incentive to use water ignores the follow-on impact of that use. Waterways are interdependent, and so a farmer’s decision to increase water use has other, negative, ramifications for the rest of the water stock.

The same issue exists for households. With water paid through rates, it doesn’t matter how much an individual household uses—they will always pay the same amount. As a result, there is no incentive to conserve, even when a leaky tap would only require a washer to stop wasting litres upon litres of water.

Although these issues are relevant everywhere, they’ve become especially apparent in Canterbury. Constant shortages during summer, increasingly dry conditions, and increasing demand for irrigation consents all indicate that scarcity is becoming a concern in Canterbury.

Given this, there has been a realisation in policy circles that something must be done. There have been plans for active management, scenario analysis, and countless meetings discussing the optimal design of a system of provision. But, as with any good and service, the best way to ensure that the provision of that good represents scarcity—the value that we place on it—is to allow it to have a market price.

Elected officials are scared of allowing an explicit price on something that we all view as a need. They would rather hide the costs by taking taxpayer money and spending it frivolously on command and control schemes that try to deal inefficiently with the allocation of water.

Within such a system we are all stuck paying for water. But the price we pay does not represent scarcity, and it is not transparent.

We may have some inherent fear of a private firm taking advantage of us if it owned the water, but private ownership isn’t a prerequisite for having market water pricing. Why not keep the water rights with government, have an SOE run water production facilities, and then have private firms bid for the right to sell water? That way we ensure competition, but we still get the signals of scarcity associated with market prices.

This doesn’t mean we should ignore the impact on the poor from introducing such a price. Far from it: the revenues made from a water price can be given to the poor, compensating them for any lost income.

The purpose of the price is simply to make households (and farmers) take into account how they are using water, and push them to remember that water is not as abundant as they may have believed. Both the impact on the poor, and the nature of competition issues in the water industry can be taken care of with the right sort of initial industry design.

Matt Nolan is an economist at Infometrics and blogs at www.tvhe.co.nz