Economic efficiency implies an economic state in which every resource is optimally allocated to serve each individual or entity in the best way while minimising waste and inefficiency. When an economy is economically efficient, any changes made to assist one entity would harm another. (Investopedia)
This definition is used by free market economists to define economic efficiency. They assume that many buyers and many sellers participating in a free market, where each acts in their self-interest, will establish economically efficient prices. Setting efficient prices implies economic efficiency. However, when there is only one seller or buyer, a free market on its own cannot produce an economically efficient outcome because the monopoly buyer or supplier interests will prevail over other participants.
Ecological and Complex Adaptive Systems ideas provide an alternative definition of economic efficiency.
Economic efficiency is an economic state in which every resource is optimally allocated to obtain the greatest value for the least cost to the community using the resource.
The first approximation for an efficient economy is for each resource to be independently optimised. This approach fits with the observed natural world where all entities interact to achieve low energy stability. Different resource systems can use the same principle to allocate overall economic efficiency across resources.
ACT Water Rewards Co-op
Using the resource-based definition ACT Water Rewards Co-op will achieve economic efficiency not through price manipulation but through directing investment.
The first step is to establish a tariff structure where a change in supply does not increase demand. ICONWater’s current water tariff achieves that outcome. To reduce demand during the Millenium Drought ICONWater increased prices. Now the drought has broken demand has not increased. In other Australian jurisdictions with different pricing regimes, demand has increased.
However, this is not an optimal price because the cost is too high particularly for low volume customers. ICONWater makes monopoly profits, but reducing the price defeats the purpose of using price to control demand. An alternative is to return value to users in another way. Instead of returning funds directly we can return funds and require customers to invest them in reducing the future cost of delivery. Such investments are to discharge existing debt, invest in delivering lower-cost non-potable water or invest in smart metering to reduce water wastage. For the benefit of the whole community, investments do not have to be in the water supply. Investments can reduce the cost of other community resources such as health services.
Investors require a return on investment and for ICONWater giving investors discounts on water costs one-third the cost of cash payments to provide the same return.
This approach will reduce the cost to the community of supplying the same value of water. The cost reduction comes from the returns on investment not from lower prices on water.
Economic efficiency comes by giving a higher return on investment to the community not by increasing prices.
Outline of ACT Water Rewards Co-op
Every user of ICONWater can volunteer to join the Co-op. The ACT Water Rewards Co-op distributes part of the profit from ICONWater to members. Members periodically receive the Right to purchase Water Rewards. Customers buy Water Rewards using their savings or by borrowing money from banks. Water Rewards are pre-payments of water at a discount. The discount is 10% per year, and the face value of Rewards increases with inflation. Water Rewards are only redeemable to pay for water from ICONWater. They are transferable, but if sold they cease accumulating discounts or inflation adjustments. Rights are transferable and expire after one year.
The direct operating costs of ICONWater are about $100M and are one-third the price of water. It is economically safe to sell $3Billion worth of Water Rewards to retire government debt. At present government debt on average costs about 5%. Removing debt will improve the bottom line of the ACT Government by $150M, ensure the ACT government retains its AAA rating while providing water customers with a high return, inflation protected, government-backed investment of $3Billion.
Instead of interest payments going out of the community the returns on investment stay with the Co-op members. They can use the returns to reduce their water payments, or they can use the returns for any other purpose.