Give credit where its due. Good policy is good policy, never mind the politics or election promises (excerpt):
The Penang government is standing by its decision to increase water tariffs despite coming under fire over the move.
Chief Minister Lim Guan Eng (pic) said the state is willing to bite the bullet and raise water tariffs in view of climate change and the worsening drought.
He assured that Penang would still enjoy the lowest water tariffs in the country.
"We are facing a climate crisis and water consumption in Penang is the highest in the nation at 311 litres per capita per day. The national average is only 212 litres.
"Such high water consumption is not sustainable and if left unchecked, Penang will have no choice but to resort to water rationing in the future.
"We have to be a responsible government. We will bite the bullet and do this (raise the tariffs). We are willing to face the criticism," he told reporters today.
The state government yesterday said that it had agreed to the Penang Water Supply Corporation's (PBAPP) proposal to raise the water tariffs for both domestic and commercial users.
It did not give details of the impending increase as they have yet to be finalised.
The announcement followed the shocking news that the wettest town in Malaysia, Taiping, has started water rationing for two weeks due to water shortage.
Penang is not experiencing water shortage at present, but Lim said the move is inevitable as consumers in Penang were not taking the state's advice to conserve water during the dry season, despite various attempts to raise the people's awareness about curbing water wastage....
Incentives matter, and for public goods this is even more important. You’re not going to cut water usage by public education programs or appeals to people’s good nature. With any good that is priced below its economically justified level, you’re will get shortages and wastage – demand will always exceed supply, while those who take conservation seriously will be outweighed by free-riders.
I go the mosque every few evenings or so, and the behaviour there illustrates this problem. Very few people bother to conserve water when doing ablutions – not surprising since the mosque bears the cost of the water. Since worshippers bear zero cost, there’s no incentive to conserve water use.
Higher prices in this sense function as an automatic rationing mechanism, where instead of everybody suffering a cut every few days or so, water use is regulated by those who can afford it. Water rationing is grossly inefficient, because it not only causes inconvenience but also business losses – water used for industrial purposes rivals household use. It’s a lot more efficient to raise prices, which minimises disruption. There’s also the not insignificant need to raise revenue for capital investment.
Two issues come to mind here – the burden on lower income households and inefficiency and waste in the domestic water industry. For the former, that’s one reason why we have a government. BR1M++ anyone? A cash transfer is a better instrument for mitigating this issue than differential pricing or water rationing. For the latter, I’ve never been sold on the argument that natural monopolies should be privatised. As inefficient as government management can be, it’s not obvious that the answer in the public goods space is a profit-maximising pseudo-market, especially since the current system is just as wasteful, with economic rents on top of everything else.
On a completely and totally unrelated note, which has nothing to do with this issue at all, and which I probably shouldn’t bring up, but I will anyway – anybody see the similarities with food and petrol price controls and subsidies?