August 12, 2017    6 minute read

Pricing: An Effective Mechanism for the Water Crisis?

Drying Up    August 12, 2017    6 minute read

Pricing: An Effective Mechanism for the Water Crisis?

Where We Stand

A dire global water crisis is not impending, it’s already here and has been for a while. 663 million people continue to be without access to improved drinking water sources and water usage has been growing at twice the rate of world population growth. In response, billions in global investment have been poured into improving access to water. This has successfully reaped critical technological developments that allow us to fully harness various sources of water.

From technologies that are already in large-scale use such as desalination, which can pump out over 86.8 million cubic metres of drinking water per day globally and supplies over 300 million users, to relatively newer but ultra-high potential ones like fog harvesting and LifeStraw which can deliver the resource to where it is most needed and lacking. Fog harvesting can sustainably bring freshwater to communities situated high up in remote mountainous regions which would otherwise present a practical and economical challenge to reach with water pipes. LifeStraw is a cheap, portable personal water filter with which a user can immediately and safely drink water from most lakes and streams.

The genius and contributions of these advances offer hope in the strive for global water sufficiency and cannot be understated. However, it is just not enough. A 2015 United Nations Report projects a 40% global water deficit by 2030 under current trends. Why? Such supply-side advances shed light on only half the picture. The other half – demand management. As with any other good, one of the crucial tools to control the demand of water is its price. Yet, as humans, our bodies require a certain amount of water to survive. So just how much can pricing influence water consumption?

Price Elasticity of Demand

The price elasticity of demand for water is a measure of how its demand quantitatively responds to a change in its price. It is calculated as the percentage change in its quantity demanded divided by the percentage change in price.

Water is itself 3 separate commodities. Water for drinking, water for domestic usage, and water for non-domestic usage. Each of these “commodities” behaves according to its own price elasticity, as illustrated by the respective demand curves above. Demand for drinking water is price inelastic. Not only do we require a certain amount of water to survive, but we are also biologically constrained on the maximum amount we can consume. Pricing, therefore, is unlikely to be of much influence here.

Domestic usage of water includes bathing, cooking, laundry, gardening and various other activities depending on individual households. Demand for water in the domestic context is relatively less price inelastic than that of drinking water as much of it is used in non-essential activities. Further, technologies and practices that can reduce wastage are readily available. Actual price elasticity figures have their limitations due to the innumerable factors involved – geography, income level, occupation, size of household, etc. – but one particular study puts the 90th percentile price elasticity for residential water demand in Phoenix, Arizona at -0.528 (negative due to the inverse relationship between price and demand). This would mean that a 10% price hike should stimulate a 5.28% fall in quantity demanded by domestic users.

Non-domestic uses of water extend to countless applications, commonly – irrigation, power plants and industrial processes such as manufacturing and wafer fabrication. Again, technologies and practices that can help control usage could be implemented given the right incentive. The sheer volume of water consumed at individual non-domestic sites is also huge, making this “commodity” highly price elastic. The demand for water in non-domestic sectors can therefore be influenced through pricing. One research paper writes that the price elasticity of agricultural water varies at -0.5 ~ -1.4 from country to country and even -3.0 in many developed countries. The latter would imply that raising water prices by 10% will result in a 30% cut in quantity demanded.

Usage by Sector

Looking at some of the world’s highest water consumers – China, USA and India – it is clear that domestic consumption makes up only a small percentage of their total national consumption levels; with drinking water being an even smaller portion of that. Deviations to this consumption pattern can be observed in an urban city-state like Singapore due to its higher population density. However, its tiny size means that its total national consumption levels are far less significant on a global scale and even here, domestic consumption remains limited to less than half of national consumption. The overwhelming majority of water consumption in these countries is from non-domestic uses which are predominantly price elastic as set out earlier.

Water Pricing in Action

Singapore implemented hikes on water prices just last month, and has planned another set of hikes to come into effect next year. It will be interesting to see how their effects play out, but this is not the first time Singaporeans have faced a rise in the cost of their daily water usage.

Singapore’s block pricing method for water is complemented by a Water Conservation Tax (WCT) that aims to further encourage water conservation, as well as a Waterborne Fee (WBF) which serves to recover the cost of wastewater treatment.

The chart displaying Singapore’s historical and recent average per capita domestic consumption figures shows a 5-litre drop in daily consumption from 1997 to 1999, which coincides with 2 price hikes. For a family of four consuming water at national average levels, price elasticity in this period can be calculated to approximately -0.09. Not a watershed difference at the individual level, but certainly a difference at the national level of such a densely populated country. The government’s decision to implement the 2017 and 2018 price hikes is in line with their target to further reduce per capita domestic consumption to 147 litres by 2020 and 140 litres by 2030. It is also imperative to note that from 2003 to 2014, consumption levels gradually dropped by 15 litres despite constant water prices. This has likely been due to the government’s constant and aggressive public campaigns to educate the population on the necessity and methods of reducing their water consumption. Such campaigns are run by the Public Utility Board at train stations, along commercial districts, and even door-to-door. The cost burden on lower-income households is offset through a direct subsidy scheme to residents of public housing, whereby the subsidy amount is determined by the size of their flat.

So Will It Work?

If pricing is to be of any effect in demand management for water resources, the key will be to target it right. The greatest scope for demand reduction is in non-domestic sectors as they make up the bulk of global consumption and tend to be price elastic. To achieve maximum effectiveness however, pricing will have to be part of a multi-faceted approach that also involves educating consumers in practices, and investing in technologies, that can consistently cut consumption throughout various sectors. Combined with our resilient advances in water supply expansion, these demand management measures would certainly bring a solution to our water crisis within reach.

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