Tuesday, April 15, 2014

Prices Versus Rationing

Give credit where its due. Good policy is good policy, never mind the politics or election promises (excerpt):

Penang to go ahead with water tariff hike despite criticism

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?


  1. I never believe in free stuff, there is always a hidden cost and someone needs to bear the cost indirectly, usually via inflation.

    Giving free money to the poor is never the solution, BR1M is a bad idea. The best policy going forward is to educate them, instead of giving them free money, the best option is to organize a free class, let them acquire some skills. If they are too lazy to attend the free course to upgrade their skills, giving free money will be like giving free drugs to drugs addict.

    Socialism never works unless the mentality of the people is on a certain level - high responsibility.

    1. @Ngan

      I go by the evidence, and the evidence says that cash transfers are an effective tool for economic development. Conversely, education intervention for adults tends to be expensive and ineffective.

      But all this is beside the point. With cheap water, petrol and gas, we are giving free money to rich and poor alike.

    2. @Ngan

      Handouts like BR1M is not socialism but populism. Neither is a welfare state under capitalism socialism. Neither too is socialism state ownership of key industries under capitalism, since that generally turns out to be state capitalism.

      Real socialism is where the means of production, distribution and exchange are owned by the working class which is the ruling class, and where production of goods and services is for social need, not private profit.

      However, I agree with you that under whatever system, a high level of social responsibility is lacking in Malaysia.

      An example, is the Malaysian habit of letting the tap run whilst they brush their teeth instead of filling up a tumbler to rinse their mouth.

      Why do people still water their plants when there is a water shortage and are the authorities doing about it?

      The other day I was in KL Sentral LRT station and found water running continuously from the spoiled tap in one of the urinals. Now why was the tap not fixed, especially at a time of water shortage?

      This is due to a tidak apa attitude which would persist under whatever socio-economic-political system, unless the government takes strong measures to educate citizens and penalise those who continue to be delinquent.

      Education and training of poor people does not help when employment opportunities are not there for them. Also, when employers discriminate against people close to retirement age or young graduates without any work experience.

      One of the major reasons why thousands of IT graduates were unemployed back in 2004 was because employers were hiring people with at least one year experience, leaving fresh graduates in a Catch 22 situation of not being able to get a job because they don't have experience, and not being able to gain experience because they don't have a job. This is what JobStreet told me.

      Moreover, even though BR1M is a populist measure, which does not solve long term low-income problems, still, it helps to some extent.

      I agree wholeheartedly with Hashamh that education, awareness raising, etc, efforts have been proven to not work on a socieltal scale, even though it may influence a relative minority of people to change their ways.

      For example, whilst several decades of awareness raising and education have made people more conscious of the need for recycling, conservation and more environment-friendly practices, still it's been a losing battle, whilst environmental destruction continues unabated, due to the profit motive, bloody mindedness and general apathy.

      How many learner drivers learn the highway code to pass their driving test, then break them once they get their license.

      For example, how many drivers respect the highway code that vehicles on a roundabout have the right of way over those entering the roundabout.

      What's lacking is enforcement, not education.

      What has made Singaporeans more orderly in whilst in Singapore is the big stick.

    3. IT.Scheiss,

      In general I agree with your contention. Now what I want to know is what did you do about it, did you report to the authorities about the leaking tap, did you drive according to the law, did you try your best to recycle or live the 3R (reduce, reuse, recycle) way???

      Zuo De.

  2. Dear hishamh,

    I'm contacting on behalf of English talk show, Bella NTV7>

    I've send an email invite to your email.

    Hope to hear from you.

    Suhaila Sariffuddin

    1. Hi Suhaila,

      I've received it, thank you. I'm waiting to hear from my bosses to see if its ok to accept.


  3. I'm guessing that your last para is a bit of sarcasm :)

    So I take it that you don't agree with the Selangor free water policy (altho for the first 20 cu m)? But does that also mean that TNB's reduced rates for the first 200kwh is also bad policy? I have no idea of the true cost of electricity but I'm guessing 21.8 sen/kwh is not reflective.

    1. Roger,

      No, I don't agree with the policy of free water - not that it really helps much. I'm not terribly keen on the differential pricing for electricity either. You're right, the true cost is much higher.

  4. Why did Europe, a region torn by strife and suffering and economic collapse after the fall of the Roman Empire, become the birthplace of modern economic growth? These two questions are at the forefront of research in economic history and important elements of public discussions. This book answers both questions with a new explanation for the distinctive patterns of economic change in China and Europe. As specialists on these two regions of the world, we make specific comparisons of similar processes. We pose, whenever possible, falsifiable propositions so that our explanations of particular phenomena can be challenged, qualified or confirmed by future research. We begin with a review of some conventional arguments offered for both China’s failures and Europe’s successes. Some of these we reject based on their inability to explain known facts. Others we accept but place into a larger framework of explanation that allies price theory and political economy. We contend that this approach provides a more satisfying discussion of the issues and formulates better answers to the big questions than do the conventional narratives. Our collaboration suggests that the alliance of economic theory with expertise in the history of both China and Europe makes for better economic history. Read more at http://economicsuggestion.blogspot.com/

  5. This comment has been removed by the author.