The community dislikes water restrictions as a way of reducing water consumption. It is fundamentally unfair and is disliked by the authorities and the population so why do we continue to use it as the main way to control the use of water during periods of shortage? The normal economic response to a shortage situation is to allow price to act as the rationing mechanism.
Unfortunately the community also dislikes the price of water increasing over the cost of supply because it is a tax on a community resource. This is the reason that we rarely use price as a demand management tool for water. The price of water would have to increase substantially above the level of the cost of delivery before it could achieve the same level of reduction as restrictions. Increasing the price to the required level is seen as unfair because why should those who have the ability to pay get more of a community resource necessary for life and seemingly free? It is this sense of price increases for a natural resource being unfair that makes price politically difficult to implement as a demand management tool for water.
However, authorities do increase the price of water to fund new infrastructure and they do put in place differential pricing structures depending on how much water is used per meter. Both of these measures are seen as fair and reasonable.
Water Rewards is a way of addressing all the above problems and doing it in the most economically efficient manner possible. It does it by using price as a demand management tool, by using money as a Reward to reduce consumption of water and by using a free market in ways to efficiently increase the supply of water.
A community can implement Water Rewards in the following way.
- When it is decided that Water Restrictions are needed set the level of consumption rather than introducing restrictions set the price of water so that the price increases reduces the demand to the level required.
- The extra money collected over and above the cost of supply is put into a Water Rewards fund.
- Distribute this money to the population as Rewards in inverse proportion to the amount per head consumed.
- Require the money to be spent in an electronic market place of ways of saving water or increasing supply.
- Allow Rewards to be traded. That is, those that cannot think of ways of investing the money can sell at a discount to those who can spend the money on saving water or increasing supply (including the water authorities)
Rewards could be controlled by a body external to the Government or to the Water Authority. It could have a board to control policy with representatives from the Government, the Opposition, the Water Authority and the community. The body could – in consultation with the Water Authority – set the amount of money to be collected and distributed as Rewards. The price of water will stay much as it is and everyone will have to pay for increased costs. It is suggested that Rewards be distributed in inverse proportion to the amount of water consumed per head but that will be a decision of the board. People do not have join Rewards if they do not wish to. Joining Rewards does entail some reporting obligations and does require people to nominate how many people are linked to a particular water meter. Merchants are under no compulsion to accept Rewards for payment and they also volunteer and specify what their products and services do and how much water is saved or generated. If either a Rewards holder or a Rewards Merchant goes against the rules of the Rewards system they will be excluded from participating for a period of time.
It is expected that enrolling in Rewards will be done with a phone call and the supply of a small amount of data about the household receiving Rewards. Rewards recipients can “set and forget” their Rewards accounts. In other words from the point of view of the consumer there is little change except they will get an account of Rewards that they can spend on anything to save water or increase supply that is in the Rewards electronic marketplace.
Cost and Savings Calculations
The price elasticity of water is estimated at about 30%. That is if the price of water is increased by 100% then the demand will drop by 30%.
We also know that for each $10 we spend on water saving and water recycling infrastructure we typically save or increase supply by 1 kiloliter per year.
Given that the current average price of water is $1.50 per kilolitre by how much do we need to increase the price of water to achieve a 20% reduction within 5 years?
We find that a 12% increase in the price of water will achieve a 21% reduction within 5 years. The first year’s reduction is 5% rising to 21% within 5 years.
Each $1 Rewards will return 15 cents return per year for ever. This means that Rewards will be traded at close to par value. It also means that the community members will overall pay less for water instead of a 12% increase. That is the 12% price increase gives an effective net cost reduction. It also means that many people will invest more money than they receive in Rewards as it gives them a way to get a good return on investment.
How can this be? What has happened is that the monopoly on the supply of water by the water authority is broken and the profits from supplying new water and saving water will accrue to individuals who spend Water Rewards instead of going to the government and the Water Authority. Of course this also means it is difficult to get such a scheme introduced because the Water Authority and the Government are the controllers of the resource and believe they have a right to the profits from the community resource and are able to spend the money on other goods and services instead of the supply of water.
How much will such a system cost? The cost of operating this system will be covered by the merchants who sell their products through the water saving and water recycling products.
|Current Cost||$1.50||Per kilolitre|
|Reduction from a price increase||30.00%||Reduction per 100% price increase|
|Extra water per $1 spent saves||0.1||Kilolitres|
|Increase price by||12.00%|
|Reduction from price increase||3.6|
|Reduction from investment||1.8||3.5||5.14||6.69||8.12|
|Money earned on investment||$2.70||$5.25||$7.71||$10.03||$12.17|
|Return on investment||15.00%||15.00%||15.00%||15.00%||15.00%|