A simple solution to those annoying water restrictions

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.