Urban Water Policy: In Need of Economics

Abstract

he thesis of this article is that Australian urban water supply and pricing policies are not well grounded in rational economic thinking. It questions the policy consensus that water is necessarily so scarce in Australia as to require the sorts of penal charges, water restrictions and use regulations which are being imposed or being considered for imposition upon urban users. It also questions the policy consensus on vetoing new dams for urban water supply, a consensus from which Queensland is partly defecting. (Rural water use is a separate story, though it seems that policy failures there have been used to justify the punishment of urban water users.) This article does not question the function of the price system nor does it suggest capital for water infrastructure is a free good, but it does argue that the current ‘water policy consensus’ which involves deliberate non-augmentation of supply, discriminatory pricing, rationing and the creation and exploitation of monopoly rents by treasuries is hardly an economic optimum. The thesis is illustrated by pointing out apparent logical problems with Australian Capital Territory (ACT) water supply and pricing policies. The ACT’s policies are more or less paralleled by other jurisdictions and its urban water prices have been driven higher than most. It is therefore a representative example of an increasingly dominant policy consensus. At the outset, one readily acknowledges that when a resource is genuinely scarce, rising prices do serve to ration demand. However, although Australia is a dry continent, it has a relatively small population and a wide variety of regional climates. Water is not necessarily scarce in North Queensland, for example, and a policy which forbids Cairns from building a second dam when six times the volume of the existing dam flows over its spillway in the wet season may be quite irrational. Few Australians live in areas with very low rainfall.