A simple solution to those annoying water restrictions

As the demands on our water supply have steadily increased, Australian governments have imposed ever more stringent rules on water usage.

Recently, the Victorian Government announced that Melbourne will follow Adelaide and Geelong in making its water restrictions permanent. It seems only a matter of time before Perth and Sydney follow suit. Yet if we are to make the best use of our water resources, we could do no better than to abandon arcane restrictions across all Australian cities - and raise the price of water.

Under the water restrictions prevailing in most Australian cities, gardeners are banned from using sprinklers, and may water with hand-held hoses only between certain hours on certain days. Car owners may not use hoses to wash their vehicles.

And if you spot your neighbours doing the wrong thing, the water authorities invite you to call a "dob in a gardener" hotline, so they can impose a substantial fine.

Water restrictions impose a social cost - chiefly on ardent gardeners and car enthusiasts, but also on the rest of us. Juggling our chores to water the garden on the right day can be a hassle. Being forced to water by hand rather than using a sprinkler system uses time that could be spent with family or friends.

Individually, these costs are small - but collectively and over time, they add up.

There is only one reason for such restrictions: the price of water is too low. Plenty of other goods in society are both important and scarce.

Almost every household consumes bread, milk and electricity daily, but without government restrictions on when and how they can be used. The trick with bread, milk and electricity is that the people who supply them charge a price that reflects the cost of production.

Presumably because it fears political backlash, governments prefer to set a price for water that is too low, and then employ a plethora of regulations to keep consumption down.

A better approach would be to raise the price of water, and let individuals choose precisely how they want to save on consumption.

Some might choose to put a brick in the toilet cistern, while hosing the car down once a fortnight. Others might be happy to pay a higher price for water so that they might have the freedom to hose the occasional dog dropping off the driveway.

In international terms, Australian water prices are relatively low. A UNESCO report in 2003 found that water was cheaper in Australia than in the US or anywhere in Europe. The British and French pay more than twice as much for water as we do, the Germans more than triple.

Can raising the water price reduce water usage? The evidence seems to suggest that consumers and businesses respond to price signals with water, just as they do with other commodities. Reviewing 50 studies from various countries on the effect of water prices on demand, the Dutch researcher Jasper Dalhuisen (pdf file 477KB) and his co-authors found that on average, a 10 per cent increase in water prices led to a 4 per cent drop in consumption.

Higher water prices have another advantage: they create incentives for the market to discover new ways of increasing supply. If we allowed the price to rise to an appropriate level, and permitted competition in the market for supply, alternatives such as recycling sewage into water for industrial use might flourish.

The most common objection to raising the price of water is that it may hurt the poor. This is an important consideration, but one which is easily addressed by a direct rebate to low-income households. Some of these households will use the money to cover the price rise, while others will reduce their usage, and put the money towards something else.

Low-income households should be compensated for a rise in the price of water, but we should not forget that the rich use more water than the poor. As a result, artificially low water prices primarily benefit the affluent. Maintaining water restrictions to help low-income Australian households is about as efficient as sending your bank details to a Nigerian scam-emailer to reduce poverty in Africa.

Most urban water authorities recycle only a small amount of their water supply at present, with demand for it constrained by the low price for fresh water. This makes it difficult for the utility to justify the outlay involved in getting more recycled water into the market. For example, half of Sydney Water's recycled water is used in-house.

Scrapping water restrictions comes down to one simple insight: when it comes to managing demand, individuals are smarter than governments. Setting the right price for water will force consumers to decide how best to conserve water, empower us to use water when and how we choose, and create incentives for suppliers to find new ways of increasing the amount of water available. Ultimately, this is the best way to manage Australia's scarce water resources.