Priceless: The Market Myth of Water Pricing Reform | Food & Water Watch
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When I scan my Inbox each day, I single out emails from Food & Water Watch because they keep me up-to-date on back-room shenanigans that affect relevant issues that are of concern to me... like the food I buy in the grocery store! And when they ask me to do something, I do it.
Paul Keleher
September 29th, 2010

Priceless: The Market Myth of Water Pricing Reform

America’s rising water demand risks exhausting available supplies. Developing effective strategies is necessary to address scarcity, improve water efficiency and encourage conservation while strengthening U.S. water infrastructure.

To tackle the tension between dwindling supplies and growing demand, many economists, market-oriented environmentalists and think tanks have advocated for market-based pricing of household water rates — essentially charging consumers more for water to encourage conservation. Most U.S. residential water rates are low, so raising these rates has a certain logical appeal. But this simple-sounding proposition is not so simple.

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Water pricing reform alone is no panacea for America’s water-management challenges. Society’s interest in ensuring environmentally sustainable water use and universal access to affordable water service is poorly served by a market model. Water is essential to life; commodifying access to water treads on the basic human right to water.

Market-oriented pricing reform contains two fundamental flaws: It focuses almost entirely on residential water use and it assumes households can or will reduce water use when faced with higher prices. Residential water use is a small fraction of water withdrawals in America — only about 8 percent of water goes towards household water use. Any strategy that ignores more than 90 percent of the problem cannot reduce total water use significantly.

Even draconian water price increases will have little impact on household water consumption, since much of residential water goes towards essential uses like drinking, cooking and sanitation. Because of this, consumer demand for water does not really change, regardless of price. Economists call this price inelasticity. Consumers will not drink twice as much water if the price of water falls by half, nor will they reduce the amount of water they drink by half if the price of water doubles. A Food & Water Watch review of the economic literature found only a modest consumer response to rising water prices. Households generally reduce water use slightly in the face of even steep price increases.

Addressing low residential water prices should be part of a more integrated water strategy, not the only strategy. While some increases in water price might help curtail excess demand for non-essential water use, sharp increases in household water rates alone will do little to curb total water demand. Public education campaigns to promote conservation and incentives for households to adopt more water-efficient appliances can do more to reduce water use than price increases alone.

Unlike households that predominantly have essential water uses, business users have greater incentives to reduce wasteful water use in the face of rising prices — and do, according to many studies. Nonetheless, today in many places, businesses pay less for a gallon of water than nearby residents.

More meaningful water savings can be achieved through restoring America’s aging and leaking infrastructure, which wastes considerably more water than residential users. Charging higher prices for industrial water users can also generate more water savings than hiking prices for residential users.

No single strategy is sufficient to address water demand-management needs. Any water policy must be tailored to local conditions and address both residential and industrial use. There is a range of policy alternatives. Focusing solely on water pricing as the mechanism for managing demand is unfair to ratepayers and doomed to be ineffective. We must recognize the collective impacts of water use, from agricultural needs to industrial needs to home needs, and demand collective responsibility.