Pricing,WaterAnacquaintanceoncesaidthat"everywaterfaucetinNewYorkCityleaks."Shewasexaggerating,ofcourse,butherpointwasthatNewYorkersdonottakethetimeorspendthemoneytorepairleaks.Why?Mostresidentsofthecitypayaflatfeefortheirwater.Forafixedmonthlycharge,residentscanuseasmuchwaterastheywant.Marginalcostiszero.Hence,thewastedwatercoststhemnothing,asidefromtheannoyanceoflisteningtothedrip.Butwhyshouldanyoneworryaboutthecostofwater?Thefigureshowsrecentpricesofanadditional1,000gallonspermonthinseveralU.S.citiesin2001,rangingfrom$1.25tonearly$3.00.(Waterratesinothercountriesoftenareconsiderablyhigher.)FormostAmericans,thisisaverysmallpartoftheirbudgets.Evenso,studyafterstudyhasshownthatmostwateruserswillindeedrespondtoahigherpricebyfixingleaks,usingabroominsteadofahosetocleanthedriveway,andotherwiseconservingwater.Imposingaquantitycharge,orraisingit,forcesuserstorethink,evenifonlyinformally,theirmarginalbenefit/marginalcostcomputationsandadjustconsumptionaccordingly.WhatisWater'sTrueCost?Evenwhenwaterutilitiesuseaquantitychargeinsteadofafixedfee,theyoftensetthequantitychargetoolow.Typicalpublicwaterutilitiesdesigntheirratestocoverout-of-pocketcosts,butsuchcostsoftenfallshortofthetrueeconomicvalueofextractinganddistributingwater.Subsidies.First,governmentsoftensubsidizewaterinfrastructure.Developersoftenmustcontributeready-to-usewatersystemstotheutility.Thesesubsidiesdonotcomedirectlyfromtheutilitycompanyandhencedonotshowupintheiraccountingrecords.CapitalEquipment.Second,capitalequipment—pumps,watermains,buildings,andsoon—isamajorelementoftotalwatercostandtendstolastforseveraldecades.Replacingawatermainbuilt,forexample,40yearsagowouldcostalmostsixtimestheoriginalcostbecauseofinflationalone.Yetfewifanyutilitiesupdatethevalueofagingcapitalequipmentwhentheyaddupcosts.ScarcityValue.Third,waterinthegroundorinastreamisvaluablebecauseitisscarce.Therighttodivertwaterfromastreamortopumpitfromanaquiferisanassetgrowingvaluetoutilitycompaniesbutagainisoftenignoredinstandardaccountingpractice.Onestudyestimatedscarcityvaluetobeatleastaslargeasallotherconventionallyreckonedcoststogether.Similarly,anyenvironmentalcostsincurredinprovidingpublicwatersuppliesshouldbeaddedtowaterrates.PricingasaConservationIncentiveForthereasonsoutlinedabove,waterrateschedulesbasedontheutility'sout-of-pocketcostsleaveconsumerspayinglessthantheyshould.Andsinceconsumerspaytoolittle,theyusetoomuch.However,anincreasingnumberofwaterutilitieshaverecognizedtheofpricingtoprovideanincentivefortheircustomerstoconservewater.Some(Seattle,WashingtonandsouthernCalifornia,forexample)haverefinedthenotion,charginghigherratesduringdroughtsorindryseasonsorforunexpectedlylargequantities.Butifwaterispricedatitsfulleconomiccost,whataboutthepoor?Severalmajorcitieshavetakenatleasttentativestepstowardestablishingwhatiscalledan"inclined-block"waterrateschedule,asshownhere:Ideally,customersunderthissystemwouldpayalowrateforthefirstfewthousandgallonsused,buttheratewouldriseuntiltheypaythefullmarginalcostforthelastthousandgallons.Thecriterionofmarginalbenefitsequalsmarginalcostswouldbemet,andyeteventhepoorestcouldaffordatleastabasicamount.TrendingTowardDemandManagement.Onaverage,Americansusemorethan1,000gallonsofwaterperday.Theamountnecessarytosustainlifeprocessesisquitesmall,perhapsafewgallonsperday.Ofthedifference,howmuchisreallyneededforba...
