Archive for February, 2012
“The End of Abundance: economic solutions to water scarcity” is another book about water, particularly drinking water, its shortages and associated problems. Do we need yet another book on that topic?
After I finally got around to read it, I think yes, because it offers some (to me) novel thoughts, that incorporate some basic economic thinking.
Water exists on earth in a constant amount. This amount cycles through the water-cycle at various rates. At some places the amount of available drinking water has been or is shrinking. David Zetland’s book tries to tackle this problem from an economic perspective.
… the real solution to the end of abundance requires that people abandon hard-won traditions that embody decades of distilled experience in exchange for novel ideas and unknown future benefits. A stable institution from one perspective may be rigid from another perspective, but institutions need to evolve with circumstances. In the case of water, good institutions prevent shortage, allowing valuable uses today while saving for tomorrow. Bad institutions make shortage more likely; they can turn abundance into scarcity faster than you can say empty reservoir. What forces a water manager to change the way his organization manages its water? Not much. In most parts of the world, water service is provided by a monopoly, which means each organization chooses how to serve its local customers without fear of competition. [...] The end of abundance means water managers [...] need to either increase supply or reduce demand. Although additional supply can be expensive, the bigger headache comes from allocating the cost of new supply among customers who claim others should pay more. Reducing demand is even harder, since it requires rationing.
Photo by VinothChandar – http://flic.kr/p/7Jcr9c
Changing a current situation, or changing a current behaviour is difficult. The situation regarding availability of drinking water might be comparable to the problem of climate warming. Some people say capitalism is not useful to lead to necessary change or else the effects of climate change are too detrimental. David Zetland’s book offers some useful thoughts of how thinking along some economic principles might lead to change. I do think that it is not along “big” economic concepts such as free trade or financial speculation. Zetland’s thoughts are more along the lines of local economics. I would even go as far as saying that his economic thoughts are as simple as thinking through scenarios of what could happen if I paid that amount or an extra amount on the good x at time t , and not a different amount on a different good. This approach gets interesting, when you’re trying to think about the effects on other goods or the same good at different times, at different locations.
David Zetland even writes that such a locally-based approach
[...] reflects water’s local origins and the difficulty of transporting water over long distances. Good water management requires that one understand local customs and solutions while looking for outside ideas that can be modified and implemented with a creativity that drives at the goal while bending to social, economic and political realities.
This might be the reason why these economic principles are explained with fairly simple graphs. Still, this type of thinking helps to think into different directions that might be useful in the attempt to avoid shortages. When do such shortages occur? David Zetland defines the end of abundance multiple times:
- The end of abundance is the same as the beginning of scarcity, but scarcity (falling supply and increasing demand) need not lead to shortage.
- The end of abundance for freshwater means we have to pay more attention to protecting our drinking water and the environment. Our definition of dirty is changing, our rules for discharge are changing, and our perspectives on local and distant are changing. Europeans try to reduce dirty water with regulations. Americans put more emphasis on market solutions (cap and trade of emissions) while also relying heavily on regulations. The end of abundance has a stronger impact on people in developing countries because they have less money and worse institutions
- The end of abundance (and rise of nasty chemicals) means sludge remaining after primary and secondary treatment is more of a liability than an asset.
- The end of abundance means prices based on cost need to be upgraded to include scarcity charges. Scarcity-based prices may not keep people from wasting water on lifestyle habits, but they will prevent shortages and ensure that people pay the full cost of their choices.
- The end of abundance means the supply side/cost recovery model of water management no longer delivers the results we want, but that model still dominates the business — from California to China, Florida to Fiji — and it will cause trouble until we change the way we manage
- Perhaps the greatest irony in the water business is that the solution to shortage — more supply — often comes from somewhere else at someone else’s expense. The end of abundance results when somewhere else runs out of water.
There are many beautiful thoughts in this book that are well worth a discussion. I am going to list three concepts related to water pricing that have been new to me and that I found very interesting:
- zero net tax (ZNT): consider, for example, an industry whose lobbyists argue against a tax on pollution — claiming that it will destroy jobs, kill babies, open the borders to invasion, and so on. Their lobbying can be overcome by replacing a tax per unit of pollutant with a “zero net tax” (ZNT) that works by measuring average pollution per unit of output, taxing companies that issue above-average pollution, and rebating those tax revenues to below-average polluters (taxes and rebates rise with distance from the average).
- “Some for Free”. The idea is based on four steps. First, every household pays a service charge equal to the fixed cost of the water connection. Second, the number of people in the household determines how many units of cheap (or free) water the house receives. Third, the price of additional units is set high enough to reduce demand and prevent shortages, not cover costs. Fourth, excess revenue is rebated per capita.
- Smart Meters: After installing meters, it’s important to think about how often customers see their bills. It’s hard to change behavior when water bills and usage statistics arrive quarterly or annually. Monthly billing is good, but real-time statistics on consumption and volumetric charges give the strongest signals to conserve. Smart meters that measure and display real-time consumption are more expensive to install and operate because they require wireless communications networks to relay data and replace older, simpler meters that last for 30–50 years
For this review I picked three examples that were interesting to me. The book is full of examples, that are worth reading, and would be worth discussing! The combination with the real-world water-related examples and some basic economic theory accomplishes the goal of how to gain and maintain that balance [between supply and demand] using economic tools to allocate scarce water in a way that minimizes costs, maximizes value and reflects local values. If I had a wish, than it would be to deepen the economic concepts a little more.
Details on the book:
The End of Abundance: economic solutions to water scarcity
by David Zetland