Arnold Kling  

Water as a Private Good

A Nation of Entrepreneurs?... Smooting the Weasels...

If you ask people to list goods that should never be privatized, water is often one of the first that comes to mind. But Richard Tren writes,

Those that campaign against private water ownership and supply on the grounds that somehow water is "different" should think again. It is precisely because water has been treated unlike other goods that it is used inefficiently in agriculture and why poor people still lack safe access to the resource. Food, like water, is essential for human survival, yet no one seriously considers that the only way to reduce hunger is for the state to seize control of agriculture and then manufacture and distribute all food. Countless communist countries have done this and it only lead to mass starvation. It is high time we recognise that markets and the private sector are the friend of the poor and an essential tool for providing water to those who need it.

For Discussion. What is different about water that makes it inappropriate to be delivered by private providers?

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The author at Knowledge Problem in a related article titled WATER PRIVATIZATION I: OWNERSHIP AND OPERATION writes:
    Arnold Kling recently commented on this Tech Central Station article on water privatization, a crucial issue. Water is one of the most inefficiently and abominably allocated resources that we have, which is appalling given its scarcity and its importan... [Tracked on December 11, 2003 10:48 AM]
The author at Knowledge Problem in a related article titled WATER PRIVATIZATION II: PRICING PROMOTES EFFICIENCY AND CONSERVATION writes:
    This post is the follow-up to yesterday's post on water infrastructure ownership and management, building on Arnold Kling's original comment. See also Robert Prather's post from yesterday, in which he helpfully provides links to his posts on the same s... [Tracked on December 12, 2003 11:00 AM]
COMMENTS (10 to date)
rvman writes:

The difficult part is supply - it comes from commons, either aquifers or lakes. Either or both COULD be privatized, but then we are trading commons problems for monopolies, or some sort of artificial "extraction rights" which makes for a poor substitute for property rights.

The delivery side of the business looks alot like electricity, gas, and telephone - the transmission and distribution infrastructure is a natural monopoly. I can visualize a world with multiple electric trunk lines running everywhere, it is hard to visualize multiple water providers running pipelines everywhere. Private providers COULD do it, but it is politically unlikely without strict regulation, at which point the government may as well do it.

That said, some places do have either private, regulated monopoly delivery, or even competitive services. And, of course, many of us buy bottled water, which is truly private provision.

Socialized water has produced too-low prices, which results in waste. (I would consider putting potable water on lawns, crops, and down toilets to be wasteful.) The Europeans have potable and non-potable, but clean, taps, for use for human consumption and cleaning/watering respectively. Having that, at least in new development, would save chemicals. We also charge too little for irrigation water - Palm Springs would die off if it weren't for subsidized water for their golf courses.

Taking this to Africa, I'm not sure that continent has sufficient private property rights to support the sort of massive infrastructure investment that large-scale private water would entail. Who's going to do it, if they fear nationalization with the next regime change? Localized private water treatment though, analagous to cheap bottled water, should be possible. In fact, I think it is being done.

Eric Krieg writes:

I don't know much about this issue, but I do have one anectdote.

My town gets its water from two separate systems. One is private, owned by Citizens Utility. The other is the municipal system.

People are constantly bitching about Citizens. There is a lot of bad feelings about the fact that they charge more than the municipal water. No one gives them any credit for making a profit, paying taxes, etc. There are constant attempts to municipalize the private system.

I think that the forces for privatization of water systems have a lot of work to do, because if my town is any indication, the force is actually in the opposite direction.

Boonton writes:

The pipes the deliever the water are actually the natural monopoly. If water is basically of the same quality, then you can buy water from whoever you want and the only regulation would be on the owner of the pipes to allow open access.

This isn't unlike the local phone company that owns the phone lines going to your house. By law they are required to let long distance companies use those lines & they can only charge a regulated rate that provides them a 'fair' profit.

Eric Krieg writes:

>>If water is basically of the same quality

Not a good assumption. Water is of many, many qualities, based on the source. Surface water is soft, ground water is hard, etc.

BUT, it is hard to understand why a water distribution system is different than a cable system. There are very few municipal cable systems, I don't see why there are so many municipal water systems.

dragoon writes:

Cable is a luxury, while water is a necessity. It makes perfect sense to me. I suppose I could have a tank and fill it up, so water delivery through centralized pipes is a convenience, but that doesn't compare to the sheer luxury that is cable.

Dave Sheridan writes:

The short answer to your question is -- there is nothing different or special about water.
If a government wants to make sure that everyone has adequate, clean water, it does not follow that government must provide all of the services attendant to its distribution. Food is also necessary for life, but the government need not produce and distribute our food to fill its mandate that no one starve. As some of the commenters mention, when government is the sole distributor, it need not sell water at a cost reflecting
a) the scarcity of the resource and
b) the actual costs of maintaining a water system.
Governments can and do price-discriminate, selling water, for example at below-market prices to agricultural customers and cross-subsidizing this by overcharging commercial and residential customers.

Even assuming that the water itself is a public good, it is equivalent to oil or timber on government land. Government can grant or lease the rights to extract and distribute public resources. Government can also mandate quality and service standards as conditions of its grants or leases.

Finally, the value of water in our lakes, rivers or snow pack isn't the same as clean, safe water delivered through our taps. Water 'in situ' has no particular value to most of us. The costs of a water system are in the collection systems, reservoirs, treatment processes, pumps, pipelines, maintenance and the assorted business functions that go along with those things. As boonton says, the natural monopoly aspect is principally one of distribution. Private companies are more likely to be able to perform those services more cost-effectively than can government, and private management can assure that the costs of water and its distribution are in line with market conditions. Should a government wish to subsidize one class of water user, it may do so out of tax revenues.

My parting shot is that governments can do (and in practice, do) much mischief when they control the entire distribution chain. There is no market discipline and little incentive to be cost-effective. Cross-subsidies are another kind of mischief. Unfortunately, when government runs the whole show, the true costs and subsidy structures are not apparent to consumers and to voters.

rvman writes:

No one dies if some fly-by-night cable provider screws up. It becomes obvious instantly if an electric generator is out of sync with the system. One bad supplier for water can screw up the entire system, and we don't have to know about if for days. That is a difference.

That said, I would like to see some sort of private system, if we could make it competitive and safe. Neither is impossible, but neither is easy to assure outside the confines of the first world. There are regulated private monopolies out there, I don't see why someone couldn't do with water what some places have done with power. (Break up the monopoly, with a monopolist pipe-maintainer, and competitive water suppliers.) But purely private providers in a marketplace? Not using pipes. Easy with tanks(like propane) or for "potable" only, e.g. bottled water.

Lawrance George Lux writes:

The one possible end to Privatization of Water comes in the form of innovation. We face a Fresh Water shortage within two decades, and are presented with a Brown water excess Today. Water Privatization would promote Rain and Snow Collection systems with long-term storage; it would also bring a efficient Conversion system to turn Brown water into fertilizer. lgl

Eric Krieg writes:

I read Lynne Kiesling's thoughts on the subject, and she is less interested in the municipal side of delivering water (which I think she would say there is no basis for), and more interested in the property rights aspect of the water source itself.

One technical aspect of water use that I think is overlooked is that water isn't neccessarily a non-renewable resource. Even when water is "used", it can be cleaned up and used again.

Okay, it might be kind of gross to think of drinking treated wastewater, but from a technical standpoint it CAN be done. More likely, we could re-inject treated wastewater into the aquifier (or, in the case of a source like Lake Michigan, send it back out into the lake) to be used again in the future.

SassKwatch writes:

Purely anecdotal, 'but'.....

My father worked his entire life for a 'private' water company that owned/operated many municipal water systems throughout the US under the 'natural monopoly' concept.

Since his retirement, the company (formerly known as 'American Water Works'...which traded on the NYSE as 'AWK') has since been bought out by a German(?) based firm called 'RWE Group'.

I don't know how the prices of the water in the cities they operated compared with other municipally owned/operated systems, but anyone looking for more info could visit....

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