Monday, 22 May 2017

Fresh water is not a public good

The title to this post is deliberately provocative, but also entirely accurate. Fresh water has been in the news quite a bit recently, including this article by Kirsty Johnston in the New Zealand Herald today. Johnston writes:
Currently, common law dictates that naturally-flowing freshwater is treated as a public good, or that "no one owns the water".
By definition, a public good is a good that is non-rival (where one person using them doesn’t reduce the amount of the good that is available for everyone else) and non-excludable (where the goods are available to everyone if they are available to anyone). It is the first of these that is clearly not true for fresh water, and this should be clear from the first three paragraphs of Johnston's article:
It was the summer of 1983 when Poroti Springs first ran dry. The watercress stopped growing, the eels disappeared and the koura died, unable to survive as their habitat turned to dust.
Local hapu, the kaitiaki of the sacred Northland springs, were dismayed at the near-extinction of its mauri, or life-force, and the loss of their traditional food source.
The culprit? The Whangarei City Council, who, unable to get to the springhead because it was on Maori land, had drilled directly into the aquifer upstream and sucked up so much water for the town supply, the seemingly endless flow ran out.
Whangarei City Council drew water from the aquifer, and that left less water available further downstream - fresh water is a rival good, not a non-rival good. Goods that are rival and non-excludable are common resources. They are vulnerable to the Tragedy of the Commons, a problem that was first described by William Forster Lloyd in 1833, but was brought to modern attention by Garrett Hardin's 1968 article of that title published in the journal Science.

The problem with fresh water is that all users together (as a group) have an incentive to reduce the amount of water drawn from an aquifer (so that it doesn't run dry). However, no individual user has an incentive to reduce the amount of water they draw by themselves, because the cost of their action is spread over all the water users.

The first problem with the current regime is that many water catchments are clearly over-allocated, or else they wouldn't run dry. Over-allocation of water also has negative consequences for water quality.

One solution for common resources is to make them excludable, i.e. making them not available to everyone. That's what the water usage permits that regional councils issue under the Resource Management Act are designed to achieve. However, giving the permits away for nothing (or next to nothing) is clearly crazy. Johnston writes:
Figures obtained by the Herald found there are now 73 companies with consent to take up to 23 billion litres a year, for an average annual fee of just $200 each.
On a volume basis, that works out at one third of a cent per cubic metres of water (1000 litres). In comparison, an Auckland ratepayer is charged $1.40 per cubic litre [sic] by council, with the rest of the country paying anywhere from 70 cents to $3 to tap into their local supply.
That is ridiculous. Water in all uses should be priced the same. Otherwise, the allocation of water is bound to be inefficient, which is the second problem with the current regime. Although, I will point out that the cost of water drawn at the source (such as by a bottling company or an irrigation scheme) should be less than the cost of water at an urban home or business, because of the cost of the infrastructure (and other costs) associated with getting the water from the source to the home or business. But I very much doubt that the difference in cost is as much as a factor of 200 or more as in the paragraph quoted above.

The lack of a consistent price is not the only reason that the current regime is inefficient. The regional councils' permits create a property right over fresh water, which I wrote about in a post last June. To be efficient though, a property rights scheme has to have four key properties. The rights must be: (1) universal; (2) exclusive; (3) transferable; and (4) enforceable. Here's what I wrote in that earlier post:
Universality means that all fresh water use would need to be included in the system (so municipal water supply, irrigation schemes, industrial use, etc. would all have to have permits to extract and use water). There can be few exceptions to this - although hydro power (where the water is not used up or degraded - that is, its use is not rival, as it doesn't deprive others of also using the same water) may be one.
Exclusivity means that all of the benefits and costs associated with extracting and using the water must accrue to the permit-holder. This essentially means that there can be no free riders - no one benefiting from water who does not have a permit to extract and use that water.
Transferability means that the permits can be freely traded voluntarily. So, if you have a permit to extract and use water from a given river, and you find someone else who is willing to pay more for that permit than whatever you value it at (presumably, whatever value it provides to you), then you should be able to sell (or lease out) your permit. This ensures that water will be used in the highest value activities, and means that water has a price (representing by the price of the permits). Failing to sell (or lease out) a permit entails an opportunity cost (foregone income for the permit holder), so selling (or leasing out) a permit to someone else might actually be the best use of the permit.
The problem with the system that regional councils run is that the permits are not transferable - they can't be sold to those who are willing to pay the most for them. Notice that we've gone full circle now - if the permits were freely transferable, then the price of permits would be set in the market for permits, and all users would face the same price for permitted water allocation.

Fresh water may not be a public good, but it is in the public interest to get this right.

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