Sunday, March 17, 2013

Microeconomics of Scarcity

Hose tripe

Banning hosepipe use is a poor solution to a water shortage

How should we respond to scarcity? Should we increase the price or should we issue rationing coupon? An interesting real world article from the Economist.
 
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SPRAY the begonias or flout the law? That is the dilemma facing gardeners in England after a hosepipe ban came into force on April 5th. Another dry winter means that water is in short supply: anyone caught using a hose to refresh a parched lawn or clean a dirty car faces a £1,000 ($1,600) fine. And if you happen to own an ornamental fountain, forget it.
The ban's aim is off. It targets how water is transported, not its consumption—which metering would do. The obsessive car cleaner can use hundreds of buckets of water without fear. Nor is the ban likely to be strictly enforced. The last time hoses were widely forbidden, in 2006, two in seven people ignored the rule. Water firms have abandoned plans to set up hose hotlines enabling customers to shop their neighbours. There is no sign yet of hose vigilantes.

The economics of the ban are all wrong, too. With low supply and high demand, prices in an unregulated market would rise. But the hose ban aims to reduce the quantity of water consumed while maintaining a cap on the price. In a forthcoming article, Jeremy Bulow of Stanford Business School and Paul Klemperer of Oxford University use theory to show that such price caps mean those who value a good most do not necessarily get it. And because they can't pay for it, consumers commit effort to finding other ways of obtaining what they want.

Indeed, the kind of behaviour predicted by theory is already visible. Dedicated websites provide lots of ideas for sidestepping the ban by exploiting loopholes in the law. Power-washing the patio is acceptable if motivated by health-and-safety concerns—to blast away potentially slippery moss, for example. Fountains may be allowed to flow, as long as they lead into ponds containing goldfish.

Another paper, by Tim Leunig of CentreForum, a think-tank, argues that heavy water users should be offered flexible contracts which would reward them for reducing usage in times of drought (farmers could plant less water-intensive crops, for example). They would be paid for each litre they forgo. That would leave the water company out of pocket but with more water. It could then sell this surplus to those that want it, at a higher price. An alternative would be to meter all water users, and to vary the price according to availability. That would, of course, mean installing meters in every house—which would be expensive, but probably a good idea anyway.

10 comments:

Alberto Mancusi said...

this is a major problem for people that is often overlooked. water supply is taken for granted but unfortunately for England they have a shortage due to the dry winter. Putting meters on all houses i feel would not be efficient.this would cost more money and could be a waste of time for the future because no one can predict the weather that far in the future. But for their situation this would be the only monitoring system to keep an eye on how much water people use. personally putting monitors on the water is the only option but it does not seem like a decent one with all the new technology today.

Lauren Haskins said...

I feel that installing meters in households would be very beneficial to the conservation of water because this would allow you the amount of water you desire to use but in turn you would also pay for that amount. It would conserve the water for people that actually needed it for various reasons and make people more aware of how valuable this resource is to life. Yes, in the short run installing meters would be slightly costly but the benefits would greatly exceed those costs.

Solange Escobar said...

Installing water meters in housholds would be expensive at first but I agree that it is porbably worth it. Raising the price on water wouldn't be good solution to the water shortage because as it's stated in the article, this would cause a problem for people that need the water but wouldn't be able to afford it at a higher price. They should set the prices higher whenever household exceed a certain limit. That way people will still be able to use the amount of water that they need, but if they feel like they want to use more then they will also have that as a luxury.

Sarah Santhouse said...

I feel that in order to avoid raising the price of water to a ridiculous amount, they should instead form a limit on an individual's usage. As the article says, people are finding loopholes and ways of getting around the ban on hoses. If a limit were put in place, while the meters required in each house are expensive, could be worth it in the long run as if a drought ever happens again, England is prepared to limit and watch each individual's usage. Using the meters they could also use a reward system in which they give heavy water users a reward of some kind for using less water in times of drought, as the article talked about.

Donika Brucaj said...

I agree that while installing individual meters in homes may be immediately costly, it will be efficient in the long term. Having individual meters allows for each home to be appropriately charged by the amount they use. Rather than banning the use of hosepipes, they should take actions that charge people individually for their usage because that will make them more conservative of their usage. If you charge a group individually they will cut back on their usage in an effort of self-interest and will be forced to pay the amount they always owe.

Ben Liberatore said...

I do not believe the ban on hoses will be effective considering in the past only 2 of 7 people actually considered the law. Meters seem to be a better solution considering there is no way around them. Once the meters are in place they should only be used in times of shortage.

Nitesh Tilani said...

I feel that installing meters on houses to constrain water usage would cause a lot of controversy. Since water is becoming very scarce in parts of the world, residents who use water more should have to pay more for it. This could be a very effective solution to the problem. If people need to use a lot of water they should have to pay more for it. Many people take water for granted, they waste water by using it unnecessarily. Meters would be expensive to install on each home but in the long run it will stop people from wasting water.

Joshua Grant said...

Installing the water meters is a good way to lower the use of water. People don’t see water as a scarcity because we have never had a lack of water. The meters will make people pay for the amount of water they use which as a scarcity it will be expensive. This may only be needed for awhile because of the weather. Installing them will be beneficial in the years to come and are worth the price to install them.

Chad Delgado said...

In the United States certain states have already begun the regulation on water usage. Los Vegas has made it completely illegal to allow any water source flow from the owners yard to the side walk. A fine is given if caught which seems to be very similar to how England is approaching this problem. Los Vegas since it is a desert like landscape are paying the home owners money per acre to dig up their lawns and create what is known as xeroscape. This approach seems to have been working for them but who wants to have the entire United States as a desert. Might as well move to the Middle East if that is the case. Orlando Florida is known to have the most efficient water usage because of their water systems ( plumbing). THey use two separate pipes one potable and the other for recreational needs such as athletic fields, car washing and lawn usage. Some of these ideas have also been useful for the shortage of water but it is costly. With any type of change we bring, we must spend money and as the economy is played right now.....we are losing.

Mariusz Mscichowski said...

I am all for preserving water and installing meters to measure the usage of water by each household. This is the only way to see how much water each house used and how much it will have to pay. However I am worried about the price of the water. Will it increase? What will happen if low-income families that won’t be bale to afford to pay for the amount of water they used? Should they stop taking showers for example? In addition even if the water meters will be in place I can almost guarantee you that people will find ways to get around that too. It sounds ridicules but its true. In my country every household has water meter which measures how much water is being used etc. As much as this should be an effective way to measure water used its not. People found ways to get around the meters and use as much water as they want. So maybe there is more effective way than just the meters?