Economics, Literature and Scepticism

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I am a PhD student in Economics. I am originally from South Africa and plan to return there after my PhD. I completed my M. Comm in Economics and my MA In Creative Writing (Poetry) at the University of Cape Town, where I worked as a lecturer before starting my PhD.

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Thursday, February 04, 2010

M&G on Water

Posted by Simon Halliday | Thursday, February 04, 2010 | Category: |

Janice Roberts at the M&G reports on water issues in South Africa.  The article's headline is 'SA water demand will exceed supply by 2025'.  So, first off, the title is wrong.  Second, the article doesn't tell us what the underlying models are, what's being held constant, what's varying.  We need to know these in order to understand what the author is trying to say, because she evidently isn't saying it well.

File:Supply-and-demand.svgSo, first off, Supply and Demand are functions, they are not quantities (see the graph adjacent stolen from wikipedia and yes, I understand that I'm adhering to certain weird assumptions using D&S graphs, but I believe they remain a decent heuristic).  If you want to talk about quantities, as in kilolitres or megalitres of water, then you should say 'the quantity of water demanded in the future will exceed the (future? current?) quantities supplied in South Africa'. Again, a function (Demand) cannot 'exceed' another function (Supply).

But, that statement is also incomplete.  Why? It doesn't talk about prices. So what the statement probably means is that the, at current prices, future quantities of water demanded will exceed the quantities supplied.  This is a bit nonsensical because the price will surely change and people will respond accordingly either by consuming less water for luxury uses, e.g., replacing huge water-sucking gardens with water-wise gardens, or having shorter showers, not installing or getting rid of a pool, or they'll find ways to recycle their water, e.g., grey water systems. 

http://www.freefoto.com/images/12/16/12_16_55---Watering-the-Garden_web.jpgNow, because water is a necessity, firms will probably have manage this with step-wise pricing systems as it is done now, with free water for everyone up to a point (currently six kilolitres per household regardless of size, again this is silly because it should be by household size, but the government has no way to credibly measure household size, and therefore some households are over-provided and some under-provided, sigh, oh, noting which I think this amount should probably be increased), and then water priced higher and higher per kilolitre the more that a household consumes.  My suggestion, as a complete novice of resource economics, would be to price non-essential water use even higher than it currently is priced.  But, this relies on an assumption that the amount of water provided to household actually affects water demand, and specifically that the fraction of the household demand in South Africa comprising those households that demand more than essential uses of water is sufficiently high to allow others to continue to use it. So this takes us to what the article could be saying, that the quantities of domestically-located water supplied will be exceeded by the essential quantities demanded by South Africa's populace by 2025.  That would be sad, but we could import water (pricey, I know), desalinate water (the technology of which will surely improve by 2025, making it cheaper) and so much more. But, of course, none of this makes for a decent headline of a nationally read newspaper. 

http://cache1.asset-cache.net/xc/AB17898.jpg?v=1&c=IWSAsset&k=2&d=A5C9C13351D9C3B751562212BF4A1D892878BC5E9F69F323D8EAC1A107A6CB71Also, please note that the article didn't speak at all about industrial water uses and industrial demand (here I'm talking about the function).  If SA experiences economic growth, and manufacturing growth particularly, then industrial demand (again the function) will increase, thus increasing the quantity demanded by industry as a whole.  This will obviously affected the pricing strategy of South Africa's water authorities.  Why? Well, they want firms to come here for FDI as FDI may (or may not) improve economic growth and increase employment.  But, because of international competition, firms will look for places with the cheapest inputs, e.g. water, electricity, labour, if South African prices increase they may choose not to come here and to go somewhere else.  So we have conflicting things happening here.  Firms that are currently located in SA may stay regardless of the cost increase and just lay-off some people (yes that sucks) to cut costs.  Or they may close (again job losses, which suck).  But with closing firms or firms cutting back, demand may decrease, or at least offset the increase in demand predicted from other sources (increased population).  But, my suspicion is that industrial demand and household demand will both increase, which will lead the price to increase and will lead firms to look for new technologies and people to look for other ways to use their current water before hitting higher prices (imagine richer households installing little alarms once they hit the next tier of water consumption - a loud voice chiming through the household 'Water is now 2 thousand rand per kilolitre!' or something).  I also favour social norm interventions and propaganda (yes, really) about water consumption, stuff like 'Do your duty, don't shower after gym!' (yes, that's a joke, who goes to gym? It's the rich folk who can afford to pay higher prices for water anyway! Duhuh...).

The problems all come from the 'other things equal' that the article implicitly held to, without telling us what was being held equal.  I get that my preferences for information probably exceed that of your average Johan, but come on, even he wants to know enough to make deliberate and informed decisions about his water consumption. 

Currently have 4 comments:

  1. Hi Simon. I just found Amaneusis - good blog!

    It's good that you're keeping M&G in check with this post, but you can't expect a journalist to write like an economist! Laypeople have the distinct advantage of not fussing over the detail.

    My interpretation of the article is limited to "at current prices, future quantities of water demanded will exceed the quantities supplied". As a n33b of resource economics I just want to make one point about the price mechanism.

    The price mechanism:
    As household and industrial demand for water continues to rise, over time the price of water should rise to:

    (i) encourage a greater amount of drinkable water to be supplied;
    (ii) encourage consumers to use water more efficiently,

    assuming the price is in this way flexible.

    Comment:
    In the South African context, the price mechanism seems an inequitable means to ration water supply. I.e. if the price of water were to rise to limit consumption, those who would be forced to limit consumption would be the poor.

    It seems highly unlikely that SA society would allow the price of water to rise uniformly in response to the growth in water consumption. Hence it is plausible that shortages could occur as prices are kept artificially low.

    You have already commented on a progressive price system for water. Incidentally this system is very similar to the existing tax system and therefore, rather than imposing a potentially complex water pricing system, government would probably be expected to finance the increased supply of water from general revenue.

  2. Hi Galen,

    I agree that I shouldn't expect all journalists to have an insight into economics. But, I think if you're commenting on resource economics then an economics editor should at least take a look at the thing before it gets published. But, we should at least be told how much of SA's water is consumed by households and how much by industry. I don't know and don't have access to this data, and, depending on this distribution, the ideas I might have about the demand and supply dynamics could be faulty.

    Nevertheless, on the price system for households, I agree that it's an inequitable mechanism for distributing water to poor households, which is why I advocate a progressive system (which I know is similar to the current system). I think that three things should happen: 1) the current progressive system should be made even more progressive (i.e. higher costs per kilolitre step-wise as consumption increases), 2) the amount of free water given to the poor should increase [though one of the problems here is excess demand when the price is zero, so I'm not certain about this, so I think maybe a price of 'epsilon']. And yes, this would have to be serviced by government. I don't know how yet, or what it will cost, but, again, this is something that we should be debating and trying to create infrastructure for, especially considering how many people still don't have piped water.

    I also hope that SA can improve its water systems. The problem is that we do not know the exact aspects of demand in the future and I find speculation about it frustrating and often misinforming. I could go on about this, but won't. Great to have your comment.

  3. Thanks Simon. Here's another of those outrageous claims in the M&G:

    "With only 2% growth, we run out of electricity by 2017. Not just blackouts, which happened even though we were only on reserve, but for the first time ever actually not having enough."

    Source: Is nuclear power really a solution? by Peter Sullivan

  4. Galen, thanks for referring to that article. Not only was it poorly conceived, it was poorly written. I don't understand how he could have been an editor at The Star writing so poorly. Or in his style:

    I do not understand it.

    He wrote poorly.

    Even when I was cycling in France and spoke to people about him.

    He still wrote badly.

    And therefore we need nuclear power.