Wednesday, August 02, 2006

You can lead a horse to water...

Save water or face hikes, Malaysians told
Aug 02, 2006
The Straits Times

KUALA LUMPUR - THE Malaysian government has warned consumers that if they do not conserve water, it will be forced to raise the water tariff.

Energy, Water and Communications Minister Lim Keng Yaik cited depleting resources and rising costs for treatment and distribution as factors.

'At the rate water is being wasted, in two years the supply of water in Selangor will not be sufficient. We may have to import water from Pahang,' Datuk Seri Dr Lim said…

A National Water Conservation Campaign was launched to reduce domestic consumption by 10 per cent over the next two years in a country where, according to Datuk Seri Dr Lim, people use water 'as if there is no tomorrow'.

In Malaysia, at least 300 litres of water are used per person per day, and in urban areas the usage is even higher at about 500 litres, compared with the recommended basic water need of 50 litres.

The main reason for the high usage, especially in Selangor, Kuala Lumpur and Putrajaya, is that water comes cheap. (my emphasis)

An average family in the main towns pays around RM30 per month - and this is even lower in rural areas where privatised service providers are absent.

The government campaign will also study water consumption patterns to understand limitations in conservation and to act on the most wasteful activities.


Minister Lim Keng Yaik should save Malaysian tax ringgit by foregoing the government campaign and buying an intro economics textbook. Maybe his opportunity cost of reading a textbook is high so I will just tell him what the problem is: The price of water is too low right now, and government threats will not change that. The price of water does not reflect its scarcity. When the price is too low, there is no incentive to conserve it. Raise the price and water will be used more efficiently.

5 Comments:

Anonymous Economically Minded said...

The price for water may be too low, or perhaps too high. I think what drives the problem is not the level of the price, but that it is set in monthly terms. That is, people are charged a fixed fee rather than a fee based on their level of consumption of water.

Because consumers pay RM30 per month, the marginal cost of consuming one extra ounce of water is constant and equal to zero. Because of this, people have an incentive to overconsume.

If the monthly price were to be increased (say to RM60 per month), that would have no effect in the marginal cost of consuming water, and wasteful consumption will still exist.

In the limit, if the monthly price were to be raised by a sufficient amount, then some consumers will choose not to consume water at all (something unlikely given how necessary this good is), or they will switch to alternative sources for water rather than from the governmental supplier.

6:56 AM  
Blogger a singapore economist said...

economically minded,

My interpretation of the statement

An average family in the main towns pays around RM30 per month...

is

RM30 = (per unit price) * (average family consumption ).

Let's suppose your interpretation is right for the sake of argument. If each family pays a fixed fee, the price per unit of water is 0. The relevant cost in this case is the marginal cost of replacing a unit of water, which has to be greater than 0. Therefore, this policy is inefficient.

7:28 AM  
Anonymous economically minded said...

Singaporean economist,

Even under my interpretation the price per unit of water is positive (equal to "per unit price" in your formula above). Once families pay the monthly fee they incurr no additional cost regardless of how much they consume. This is what I meant by 'zero marginal cost'. I didn't want to imply that price for water should be zero.

Indeed, replacing water is not free and families are not internalizing these costs if they only pay a fixed monthly fee. Families can internalize this cost if they are charged a rate that depends on their level of consumption of water (i.e., a rate that will make them face a positive marginal cost for each unit of water).

I guess in general terms we do agree. To induce efficient levels of consumption of water, the price schedule that families should be charged should reflect the cost of replacing a unit of water.

8:03 AM  
Blogger a singapore economist said...

Yes, economically minded, I think we agree.

To be clear, I intend price per unit to mean the price a family pays if they consume an additional unit of water.

1:43 AM  
Anonymous miami office space said...

aww this measures are too several, but maybe peolpe can understand, that not only in their conuntry have those problems, I think is a problem arround the world! so please, come on, the water isn't for ever!

12:25 AM  

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