Comparing price and non-price approaches to urban water conservation.

Most economists advocate market-based, that is, price-based, answers to the problem of how to allocate resources. This includes the allocation of water. The idea is simple, if you charge a higher prices for water, people will use less of it - that is, the demand curve for water slopes downward. Government officials, on the other hand, trend towards the use of non-market allocation methods. For example, in times of water shortage instead of altering prices, officials enact water bans and the like to get people to use less water.

The question is, What works better? According to a new paper on the issue, the answer is the market. Sheila M. Olmstead and Robert N. Stavins have a new NBER working paper (NBER Working Paper No. 14147, Issued in June 2008) out on Comparing Price and Non-Price Approaches to Urban Water Conservation. The abstract reads;

Urban water conservation is typically achieved through prescriptive regulations, including the rationing of water for particular uses and requirements for the installation of particular technologies. A significant shift has occurred in pollution control regulations toward market-based policies in recent decades. We offer an analysis of the relative merits of market-based and prescriptive approaches to water conservation, where prices have rarely been used to allocate scarce supplies. The analysis emphasizes the emerging theoretical and empirical evidence that using prices to manage water demand is more cost-effective than implementing non-price conservation programs, similar to results for pollution control in earlier decades. Price-based approaches also have advantages in terms of monitoring and enforcement. In terms of predictability and equity, neither policy instrument has an inherent advantage over the other. As in any policy context, political considerations are important.

(HT: Market Power)