Monday, 15 September 2008

Oil and Water

David Zetland has a second guest post at Freakonomics. The topic this time, Oil and Water. Zetland opens by saying
Over the past few months, newspapers, blogs, and television screens have been filled with stories of two precious liquids — oil and water. Although the stories seem similar (demand outstripping supply), they report fundamentally different means and success in coping with “shortage.”

Ironically, we are coping better with scarce oil — nearly 60 percent of which we buy from abroad — than scarce water, which falls from the sky.
But why is there such a contrast? The answer is of course markets. We have them for oil but not, by and large, for water. Zetland puts it this way,
Why such a contrast? Because oil is bought, sold, and marketed as a commodity. Water, in contrast, is treated as a “human right” that should not be allocated by price. Because scarcer oil costs more, quantity demanded falls to equal supply. Because scarcer water does not cost more, demand exceeds supply and rationing, misallocation, and hardship result.

Put differently, we would not have water shortages if water prices rose and fell with supply and demand. But prices do not change that way.
The bottom line in this case,
We don’t have a gas shortage because gas is expensive; we will have a water shortage until water is expensive. Want more water? Pay for it.

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