Monday, October 3, 2011

The Economics of Water

Global water consumption has tripled since 1950 leading to vast shortages across the world. It is estimated that 1.1 billion people worldwide do not have access to safe drinking water. Since North America has 21 percent of the world’s fresh water, most Canadians and Americans do not understand or appreciate the value of fresh water.  The average American consumes nearly 350 litres of water a day—twice the global average.

The key challenge is figuring out how to preserve our precious supply of water and eliminate excessive consumption.  As David Zetland—an influential water economist currently working at Wageningen University in the Netherlands—points out in his research, water prices must increase to bridge the current gap between supply and demand. Zetland discusses water policy at length on his website www.aguanomics.com but his solution is to implement a pricing scheme that will eliminate excess consumption.  Zetland proposes implementing a pricing scheme whereby households would receive the first 75 gallons of water for free; however, every additional 75 gallons would cost $5.60. This pricing system would ensure that everyone gets a basic allocation of cheap water while forcing excessive water users to pay more. This model follows the basic economic principle that as price increases demand decreases. Pricing is without a doubt the most effective method to reduce demand because it directly impacts the end user. Further, through incorporating Zetland’s model, municipalities would get additional revenue which could be invested in infrastructure improvements or educational initiatives. Municipalities could even use their increased revenue to provide subsidies to homeowners for switching to appliances with lower water consumption (i.e. low flush toilets, low-impact showerheads, more efficient dishwashers etc).

By Trevor S.