[620] Of raw economic model on fresh water conservation

Dams around Klang Valley are running low on water. Despite that, I see some people water their plants during a rainy day while others wash their vehicles as if fresh water is unlimited commodity. Disgusted by the indifference shown by those people, I sat on a corner one day and tried to think what could make them care before water actually ran out and subsequently, the need of rationing. It didn’t take me long before I realized that the answer a mere basic supply and demand model.

Currently, at least in Kuala Lumpur, consumers face tiered-pricing scheme. The first 20 cubic meter cost RM0.57 per cubic meter. The next 15 cost RM0.91 per cubic meter and anything extra costs RM1.70 per cubic meter. Now, because the prices are fixed regardless of supply level — assuming ceteris paribus of course! — consumers really don’t have the incentive to conserve whenever there’s a shortage.

If we could somehow float the water price according to abundance, perhaps the flexible price or prices itself could give an appropriate signal to consumers. To put it bluntly, whenever there’s unreasonable scarcity, the price would say “hey bitch, conserve for fuck’s sake”. After all, efficient pricing theory suggests that in free market, without asymmetrical information, all information is expressed in prices. Yes, only in economics where all information could be compressed into a number…

Those that are unable and unwilling to conserve will be forced to pay more. Just imagine how high water prices should be right now in Kuala Lumpur. Note too that water supply is not an easily tradable commodity. So, as an example, if there is a water shortage in Kuala Lumpur, we really can’t just import it from, say, Singapore even if water is cheaper there. Hell, I don’t know why we want to import water from Singapore. But I trust you get the idea.

However, since water is a basic necessity of life, and the poor might be able to afford a high priced water, perhaps we should impose a price ceiling up to a certain amount (or even some quota per person in an average household) — an amount sufficient enough to sustain a non-wasteful lifestyle — something similar to the original first-20-cubic-meter-cost-57-cent (or sen) scheme. Anything higher than that amount should be charged at equilibrium price. Or, maybe even at equilibrium price plus any loss incurred due to the price ceiling. Since it should be very expensive in real term, conservation is almost guaranteed.

Four paragraphs to describe supply side; one paragraph for demand side. One paragraph to rule them all. Ack! Imagine the same thing but diametrically. Price will be higher due to low supply and high demand.

With exorbitant price, demand should decrease (assuming demand elasticity allows a decrease) and bring about a state where rates of water discharge at various dams are lower than replenishing rates. Thus, making an increase of supply possible. And greater supply lowers water price. With this regime, it’s obvious that water price will sway a lot but it will be at a dynamic equilibrium and more importantly, it’s an efficient and sustainable pricing. At the same time, it will combat Kuala Lumpur and Klang Valley’s problem.

And if demand outstrips supply, perhaps the reality of ridiculously high water price would actually rally local masses to demand certain somebody to finish up a project that connects Pahang’s water cache to Selangor’s. I wonder who is that certain somebody is…?

p/s — I’ve installed WordPress on my server. It’s here. Still need to import Blogger’s stuff into WordPress. I’m not sure about using WordPress right now. I kind of have this sense of loyalty to Blogger. But having a complete control of everything is tempting.

pp/s — na na na na na, na na na na na, na-na-na na-na-na na-na-na na, Let’s Go Blue! The Wolverines defeated the Spartans in OT again!