Chocolate and Gold Coins

Wednesday, August 03, 2005

Water, Water, Everywhere

Is water a different kind of commodity than oil, rice, wood, or anything else you could buy? Fresh water is actually an extremely abundant commodity and luckily I don’t have to pay much for it. I get it piped to my house and I only pay $2.35 for 1000 gallons. (I pay about $3 for 1000 gallons for sewage).

That’s cheap by anyone’s standards.

I wonder if the government subsidizes that cost. I don’t know why they would. It’s not like there are a lot of poor people who live in Fairfax County that could not afford to pay $5 or $10 for 1000 gallons.

The argument that water is a special commodity that needs to be given away free is nonsense; it may be cheap but it isn’t free. Any commodity given away free is going to be terribly wasted. I had a leaky toilet that needed to be repaired. I didn’t really want to do it, but I knew it would waste water and I was paying for it, so I fixed it. If I were paying more for water, I would have done it sooner.

Water might be more expensive in India than in the U.S. because there are more people and less water available per person. However, I doubt that an efficient market in water would produce a price much more than double of triple my price, after all, Indian labor is so much cheaper than here. Even at $10 per 1000 gallons, water is cheap: that works out to be about 100 rupees per cubic meter. I would be curious to know what residents in India actually pay for water.

Two recent posts got me thinking about water:
1. The post by Sunil Laxman on how an NGO trying to help a village get running water might cause unexpected problems,
2. The post by Dilip D’Souza on the politics of the water associated with a new dam in Gujarat.
In each case, I think the fundamental problem was that the water was not sold but just given away.

In Sunil Laxman’s story, an NGO tries to help a village by piping water into each home. But some homes get the water before other homes and this causes communal strife. Also, once water is piped into people’s homes, the temptation to waste water is huge. Before, people had to physically go to the common well and draw water and carry it to their homes. This labor put a price on water (a very high one, in fact) and the water was not wasted.

One solution is to create a corporation that will lay pipes to people’s homes and charge a fee for water usage. The water would be metered just like at my house. This corporation could not charge too much for water or else people would simply revert to going to the well and carrying it back to their homes. But there may be profits (if not, than it isn’t worthwhile to pipe water into people’s homes in Indian villages, an unlikely possibility but a possibility). If there are profits then firms would bid for the opportunity to be the water company and this money could be a nice windfall for the village.

The point is, if it is profitable to pipe water to people’s homes, everyone will get their water at the same time, and there will be no reason for communal strife.

In Dilip’s story, the water was going to the haves at the expense of the have-nots. Ironically, this is because it is free. In a world where you pay for water, everybody’s money is the same color. Of course, a decision to build a pipeline from point A to point B will necessarily be political, especially if that pipeline crosses political boundaries. But, in the end, everyone will get their water if they have the money to pay for it, and water is never a very expensive commodity, even in India. There won’t be any reason to shortchange the have-nots if you are selling the water, because they could buy it like anyone else. But if someone tells them they should get it for free, they may wait.

Waiting for water…what could be a bigger waste?

18 Comments:

  • The issues of water are really very complex, and though I read about it regularly, I don't think I still understand it all.

    But it is obvious that without any regulation, it only leads to massive waste. The pay-for-use model will work, but only if prices are fair and distribution equitable.

    To me, the most effective solutions (at a rural level) is when the community has decided to effectively handle it's own resources. Here, water is a "commons" resource, but not without accountability. So, local tanks etc are maintained by the community, and there are rules (that the community decides on) deciding what crops can be grown, how much water can be pumped etc, depending on how much water is there.

    Some balanced mixture of community rights as well as monitoring is perhaps likely to work best.

    By Blogger Sunil, at 9:57 AM  

  • My father told me an very interesting story about the village where he was born. My grandfather was a local official and he also owned some land there. There was a clear water lake in the village and my grandfather ensured (not as a part of his official duty) that nobody polluted the lake. For years villagers enjoyed access to drinking water. After my grandfather died, slowly villagers started using the lake for washing clothes and their livestock. Guess what, lake is no longer usable for drinking water and lies unattended. And villagers have to beg government for drinking water or have to get it from government installed wells in the nearby villages. Even those are drying up because of wastage of water.

    I was just wondering if my grandfather (or for that matter anyone else) would have had property rights on that lake wouldn't the result been much better? He could have sold the lake to somebody else who could have taken care of that lake and sold water to the villagers. It doesn't matter who would have got property rights on that lake as long as other villager simply recognized those property rights. The result would have definitely better than the situation right now.

    By Blogger Ashish Hanwadikar, at 10:20 AM  

  • My father told me an very interesting story about the village where he was born. My grandfather was a local official and he also owned some land there. There was a clear water lake in the village and my grandfather ensured (not as a part of his official duty) that nobody polluted the lake. For years villagers enjoyed access to drinking water. After my grandfather died, slowly villagers started using the lake for washing clothes and their livestock. Guess what, lake is no longer usable for drinking water and lies unattended. And villagers have to beg government for drinking water or have to get it from government installed wells in the nearby villages. Even those are drying up because of wastage of water.

    I was just wondering if my grandfather (or for that matter anyone else) would have had property rights on that lake wouldn't the result been much better? He could have sold the lake to somebody else who could have taken care of that lake and sold water to the villagers. It doesn't matter who would have got property rights on that lake as long as other villager simply recognized those property rights. The result would have definitely better than the situation right now.
    Ashish

    By Blogger Ashish Hanwadikar, at 10:21 AM  

  • Hi Sunil and Ashish
    Sunil: In thinking it over some more, I got the feeling that one of the big problems here is that maybe these villages lack effective government. If you wanted to start a business in a village in India, who would you go to become incorporated and who would protect you if someone tries to infringe on your property rights? If a village wants to create a water company (like the one that serve my area here in Virginia), how would they go about it?

    Ashish: that is a wonderful anecdote you shared. That is a classic example of the tragedy of the commons. Yes, someone needed to establish ownership of the lake and it could, in principle, been the local government. But they needed to pass ordinances and fine people heavily for misuse of the lake.

    It doesn't really matter if the lake is owned by an individual or by a group or even a village, if no one is protecting the property against those who are "squating" on it, then it will be misuse. This, I think, is a very common problem in India. The poor will see a plot of land that belongs to the community and build a hut on it. Pretty soon you have a little shanty town. You will have the tragedy of the commons all over again with lots of land misused and no one really owning any of it.

    By Blogger Michael Higgins, at 11:56 AM  

  • Hi Michael,

    A couple weeks ago, Amit wrote about water problems in his apartment building:

    Things aren't too good with water supply in many parts of Mumbai: water comes at my house three hours a day, and we have to make sure that someone's at home at that time to fill the overhead tanks. My building is worse off than some others because the khadoos power-tripping secretary of my housing society refused, out of misguided principle, to give a bribe to a BMC fellow. That was two months ago, and we've been screwed since.

    I think there are some pretty bad water problems in Andhra too. People are digging deeper and deeper in the hope of finding water, and they are not finding any success. I think a bunch of farmers in Andhra committed suicide because they wasted a lot of money digging for water which was never there. If pipes were laid to farms and cheap water was provided, everyone would be better off.

    Vikram

    By Blogger Vikram A., at 12:30 PM  

  • Interesting thoughts Michael and even more interesting comments. Your blog for one has the most interesting comments ---- maybe its you!!

    My two cents on this topic:

    The ownership of water resources actually was prevalent in India, but it led to class divisions and caste discriminations, where the higher caste would not allow others of the deemed lower castes to use the water resources at any cost. Hence a pure ownership and putting a price on the commodity may be a simplistic solution.

    I agree that most of us do not "value" water because it is perceived to be free or very very cheap.

    How about allowing a certain amount of water to all for a minimal (maybe even subsidized) price. Quantity which is enough for the basic and dire necessities of Drinking and cleaning.

    There should be a premium price on the extra water that people require for other needs.... like pets, gardening, washing cars, washing houses, air coolers, sprinkling water for cool temp, holi etc etc.

    I think the basic needs of people for water (drinking, cleaning and bathing) will be same in quantity and thus can be rationed based on the individuals.

    The other uses of water can be priced higher. What do you think?

    By Blogger @mit, at 12:59 PM  

  • Hi Michael,

    The main reason why water is such a big problem in India is because government gave away cheap/free water for a long time. That led to things like sugarcane plantations and dyeing units in (relatively) arid regions which used water inefficiently. If water were priced correctly, these would never have been started. But the fact is, water has been excessively used in the past and in many places in South India there is simply no water available unless heavy investments are made in transporting water over large distances.

    To make such investments, it's obvious that users have to pay for water. But in the current situation, it's likely that the price will be out of reach for many poor families. Differential pricing is one, but not very satisfactory, option. (After all, the rich people's marginal rupee is cheaper than the poor man's - so with differential pricing both will incur the same cost)

    This is all a political minefield, and the problem is in identifying where to begin correcting the mess.

    By Blogger Eswaran B, at 12:59 PM  

  • But the fact is, water has been excessively used in the past and in many places in South India there is simply no water available unless heavy investments are made in transporting water over large distances.

    not true.....the amount of water run off in South India (just like it is in any other part of India) is huge.

    Traditional water harvesting structures have come into disuse, and temple tanks (which used to be a major source of water in villages, and recharged ground water) have died completely. In old cities (The Chola city of Gangaikondacholapuram is a prime example), rain water from the streets would lead into a city or temple tank, and ensure that it would be full. Careless urban growth ensured that these inlets were blocked, and no gw recharge took place. Hence, massive droughts in the Tanjore district, or in parts of Andhra etc.

    I would definitely recommend this website which has very detailed information resources, to get a good starting point for understanding Indian water issues.

    By Blogger Sunil, at 1:44 PM  

  • Sunil,


    not true.....the amount of water run off in South India (just like it is in any other part of India) is huge.


    I accept this and I also agree that careless urban growth are big problems. Just goes to show the difficulty is ensuring "ownership" of water resources in anything but small villages. But I reiterate that in many places groundwater has depleted to very low levels because of indiscriminate use.

    The main reason Cauvery water is not being released from Karnataka is because they need the water themselves for.. water-intensive paddy plantations. In my native town(10 kms from dried-up cauvery river), many dyeing units were supplied with water taken from borewells in the river. Now, the ground water level is somewhere around 200 feet in the town. All around the town are open areas with either fields or shrubbery and there is no other reason why water level should go very low there.

    If what you say is applicable in most situations, simple steps are sufficient to ensure water supply to everybody. If what I say is applicable in most cases, large investments are needed to ensure supply and user-payments are needed to ensure sustainable supply.

    By Blogger Eswaran B, at 2:05 PM  

  • Hi Vikram, @mit, and Eswaran:
    That is too sad about the farmers commiting suicide. The South of India is drier and sometimes the monsoon fails. I know that the water is a big issue in Tamil Nadu and a source of conflict with Karnataka. It is a pity too because I'm sure that plenty of water falls on that area to meet the needs there - except maybe they should grow drier crops and import the rest from the North. This would naturally occur if a true market for water occurs.

    @mit: Yes I have noticed the high quality of comments on this blog. Must be a very intelligent group of people who read it. :)

    How about allowing a certain amount of water to all for a minimal (maybe even subsidized) price. Quantity which is enough for the basic and dire necessities of Drinking and cleaning.

    I don't think that is necessary. I think the current system where the poor have the option of going to the collective well and drawing water and taking a bucket back home is sufficient for the truly desparate. For everyone else, they can have the water piped to their homes and they will have to pay for it. If you want to help the poor, it is better just to give them a little money than to give them free water because then they won't waste the water. And it is extremely important that farmers pay for water because farms are by far the biggest water guzzlers - and the price determines the proper choice of crops.


    Eswaran: your point about sugarcane in arid areas is exactly what I was trying to get at. It always happens when you give away a commodity free. I remember reading that Poland was (under communism) a center for tropical flowers because they used to give electricity away for free.

    By Blogger Michael Higgins, at 2:26 PM  

  • Hi Sunil and Eswaran
    I cannot comment on the issue of whether large amounts of water need to be piped or not. I think it maybe need in Chennai (it would be a waste if they went to desalination). But I'm sure the price will go down quickly if the market for water becomes more establish.
    I was amazed at how cheap water is in my area. I thought it was 10 times more expensive (I guess my family just uses a lot of water). I wonder how much water is in the cities in India. Does anyone know?

    By Blogger Michael Higgins, at 2:31 PM  

  • Michael,

    Information about water tariffs in Bangalore can be found here. It looks like the minimum cost is about 40c for 1000 gallons and the maximum is something like 2.5$ for 1000 gallons, in line with the charges in your area. But this is probably subsidised by the government because Bangalore water supply is supposed to be very expensive (water has to be pumped over 100km over a upward gradient of about 150m from some sections). Also, the capital costs of the projects are usually borne by the governments and/or world bank.

    There is one problem with your argument about letting the truly desperate people draw their own water from the communal well. There are no communal wells for the urban poor.

    By Blogger Eswaran B, at 5:09 PM  

  • I agree with @mit in that there must be a fixed X gallons/person supplied free to every household. Each additional gallon must be charged based on differenial pricing with steep hikes at each step.

    Michael, I am going off on a tangent here. Looking at your earlier post (on natural monopolies), this one, and posts by other economists on recycling etc, it appears that the best solution to everything, for economists, is leave it to the market.

    Water is one of the two key resources for one's survival, we nearly take for granted - the other being air. If you recommend a market solution for water, then with the depletion in air quality, would you also consider the CO2 trading systems in place (or nearly in place) in EU countries to be the way to go for ensuring we do not misuse air?

    By Blogger Iyer the Great, at 6:50 PM  

  • Iyer the great says (and then questions):

    it appears that the best solution to everything, for economists, is leave it to the market.

    I'm not so sure about that too, especially in regard to water. Consider Sunil's point about how the lack of regulation leads to massive waste. Consider Eswaran's point about there being no communal wells for the urban poor.

    An entirely market-driven solution pays no attention to the people who are denied access because of social reasons -- which applies in India for sure -- or purely because they simply lack the purchasing power. (Take a look at this from Anand, the Guardian reporting on how free market methods haven't helped the poor in Niger).

    Maybe this is a subject for another article somewhere, but briefly: in 2001 after the Kutch quake, I went to work there with a team from the NBA, comsisting of farmers from the MP areas that would suffer due to the Sardar Sarovar dam. In Kutch, after immediate relief issues, the major concern was, as it always is in Kutch, water. For the first time ever (as far as I know), people from both "sides" of the dam -- MP and Kutch -- sat down to discuss their concerns about water. It resulted in the NBA actually building a small (but substantial) dam in that village, providing year-round drinking water to the villagers long before Sardar Sarovar would get the water there. A year later, I saw that dam complete.

    This is the kind of thing I think has to happen more: the people concerned with various sides of the water debates sitting down and discussing issues and working out the solutions. I think this is what Sunil is getting at too.

    By Blogger Dilip D'Souza, at 12:34 AM  

  • All - As much as I am a supporter of the Laissez-Faire Economic policy, I also think that excess of anything is bad. Even in the Free Market, there has to be some regulatory control. In steps the Govt. However as simple as it sounds, it gets complicated on the ground as Power to regulate corrupts the powerful.

    I would still advocate that a developed economy and not so poor nation should provide the basic necessities of life to its subjects at the minimal (subsidized) prices. e.g. Medical facilities in England or Water in the USA or Rationed Grains in India. It is a socialist concept, but as I said excess of everything is bad

    By Blogger @mit, at 3:04 AM  

  • Hi Eswaran, Rahul (Iyer...), Dilip, and @mit
    Interesting comments all.
    Dilip: I wrote a long comment on Anands blog about that Niger situation (although I cannot claim to know all of the particulars)

    In general, I would never say that free markets work in all situations with any intervention. If there are serious problems with externalities (pollution etc) you need to find a way of dealing with that either by regulation or by a clever way of allocating private property rights. Ashish's lake example is a good example of what happens if you don't have rules or you don't enforce rules. That tragedy would occur even if the lake was private property but people ignored the private property rights and no one enforced the rules.

    Clearly, the creating of a dam is a political matter because rivers are always public goods. You could create a private semi-regulated corporation to build and operate the dam, but only a government could sanction this, and it may be an issue for several state governments if the river runs across state lines (as river tend to do). So indeed politics is necessary to create a good outcome.

    Rahul: your point about economist saying that a free market solves all problems is not exactly my stance. I understand externalities and the need to deal with them. But sometimes a clever allocation of private property rights does works. The example you site of the CO2 emissions right (or the other polution rights that are traded in the US) is a market way of dealing with externalities that I think works well.

    In thinking it over, I don't have any objection in principle to the idea that maybe we could "gift" everyone a small amount of free water. As long as the marginal cost of water reflects the cost of producing it, then I don't think there is much reason to think water will be wasted.

    By Blogger Michael Higgins, at 4:41 AM  

  • Water privatisation was a huge success in Bolivia. I waiting eagerly for this success to spread all over the world.

    yum yum

    By Anonymous Anonymous, at 6:45 PM  

  • "One solution is to create a corporation that will lay pipes to people’s homes and charge a fee for water usage."

    If it's 100% free market, then other corporations can enter the water market to compete. You're free to switch from water company A to water company B...

    http://www.pseudotheos.com/view_object.php?object_id=912

    "...When you're running water pipes in a city because we've decided everyone should have water available at their house, it's simply easier to have a single agency handling the whole thing. Sure, you can (as a lot of places do) fake their being several different providers of the service, but they often do little more than have their own billing and technical support staff, while sharing (and leasing) the same central resources from city, county, state, or federal governments. It would be costly and dangerous to have anyone and everyone providing the service of running water pipes to your house -- who knows what might happen to the shared resource (damage to the line, leaks, poison, etc.)..."

    ...so if you do then you pay water company B to lay another pipe to your home (if A and B are freely competing instead of a monopolistic cartel then A won't let B use A's pipe to your home).

    Now what happens to the owners and users of the land above those pipes, and their freedom to use that land, when customers' freedom to switch water companies means digging up that land to lay new pipes all the time?

    Say you own a road and have the right to keep charging people a fare to use it this week, while someone at one end of the road has the right to start buying running water for his home from a new water company at the other end of the road this week?

    By Anonymous Anonymous, at 6:05 PM  

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