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October 07, 2008

Pricing Wars

For those of you inclined to engage in a philosophical discussion on whether water is a basic human right or an over-regulated, inaccurately priced commodity, log onto The Economist Web site for an online debate.

The Economist debate, sponsored by The Dow Chemical Company, a Global Innovation Outlook Partner, features some of the highest level discourse you’re going to find on this endlessly complicated, impossibly emotional topic. The basic proposition is this: Water, as a scarce resource, should be priced according to its market value.”

It is a theme that has come up time and again during our deep dives on Water and the Oceans. Those that advocate market pricing believe it is the only way to improve the efficiency of the distribution of water. Those opposed to market pricing believe that life-threatening inequalities will result if water is seen as anything but a shared resource.

As always, there are shades of gray however. Some of the participants in the GIO have proposed some clever strategies for driving more equitable distribution of water supplies. For example, there are tiered pricing models that would grant all human beings (and businesses) a predetermined amount of water units. This public allotment would be free and sufficient for all basic needs. But anything above and beyond that usage would cost extra. As your usage ratchets up, you pay greater dollar amounts for each additional usage. You would have plenty of water for drinking and bathing, but if you want to water your lawn as well, you might have to pay 50 cents a liter (don’t get hung up on these hypothetical prices.) Filling up the swimming pool might get you into the $1.50 range. And so on.

It’s hard to imagine one system working on a global basis (anything’s possible, right?). But you could see it working regionally. Of course, some would argue that this is already happening. I personally pay for my water (both by paying the private company that provides it, and through the taxes that pay to treat my waste water.) Bottled water is a $100 billion business. Even homeowners that drink well water pay for drilling and maintenance of the system (those of us who have incurred this particular expense know that the water that runs beneath our feet is anything but free).

In all these cases the vast majority of the costs are not the water itself. It is the distribution of the water. As one GIO participant noted, “God gave us the water, he just forgot to lay the pipes.” Which brings us back to the premise upon which this entire GIO is based: there is plenty of water in the world, it’s just not well distributed.

October 7, 2008 in Water and the Oceans | Permalink

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Comments

I think the concept of Marginal Utility might be worth a look -

http://en.wikipedia.org/wiki/Marginal_utility

This combined with Local Water Stress levels could possibly be used to create a qualitative price structure. At least it explains why people in different places are willing to pay different amounts for water.

In the end, a commodity is only really worth what someone is willing to pay for it.

Posted by: Tim Raisbeck | Oct 9, 2008 9:36:18 AM

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