In times of crisis, we get what we pay for
A week of intense wildfires in southern California displaced the news from front pages, but the drought in the southeastern states rages on, despite a few welcome but too-brief rain events. As sources of drinking water slowly exhaust themselves, under pressure from growing demand and lagging supply, one wonders why governments in the region don’t raise water prices to encourage conservation.
Instead, most areas have chosen to ration supplies with top-down orders, which protect consumers from rate increases but force governments to spend time and energy enforcing the rules, and which all too often prove unequal to the task of conservation. It’s hard to believe that strict rationing and intrusive enforcement are more acceptable to citizens of the affected areas than higher rates for water, but when elected officials are involved in policy making, increased consumer rates are a third rail to be touched at great risk.
Much of the country’s critical infrastructure and many of its utilities are either directly controlled or heavily regulated by government institutions. This isn’t surprising. Infrastructure networks are subject to large positive and network externalities, such that purely private markets wouldn’t provide enough of the needed public goods.
Utilities are occasionally private, but are nearly universally heavily regulated. Opening a utility operation, particularly when transmission networks are needed, is an expensive proposition, and with the threat of competition few investors would find such a proposition appealing. Governments can encourage investment by guaranteeing a utility monopoly rights, but governments are then encouraged to regulate and monitor utilities to prevent abuse of that monopoly power.
The end result of these public arrangements is to insulate final consumers from anything resembling a market price on many scarce resources. This tends not to matter when supply runs well ahead of demand — when Lake Lanier is full and Atlanta is half its current size. As populations around the country grow, however, it becomes a serious problem.
If roads are free, then drivers will use them until there is no road left to consume — at the point where your car rolls to a stop on the jammed freeway. If water prices fail to reflect shrinking supply, the consumers will continue watering lawns and washing cars until the reservoirs run dry. If population growth runs ahead of power capacity, but retail electricity rates are capped, then lights will dim and go out during peak demand periods.
Water shortages, rolling blackouts, and epidemic congestion are painful and costly consequences of underpricing in their own right, but the problems don’t stop there. Without proper price signals, consumers have little incentive to conserve or invest in efficiency. As rates rise, purchasers of public goods cut back on the least valuable use of those goods first, ensuring that conservation efforts are as efficient as possible.
That’s not the case with random or government mandated rationing. One of the best ways to slow emissions growth in this country would be to simply stop building new coal plants. Given market rate power pricing, such a supply restriction would open the door for competition from alternative power sources. With caps on retail rates, that benefit is lost.
Given that public managers and regulators cannot bring themselves to increase rates given the political challenge of increasing consumer costs, some argue for deregulation of public utilities and infrastructure. Of course, the process of deregulation is itself a political one, and if higher consumer prices are a probable effect of such liberalization, there’s no reason to suspect that strategy would be any easier to sell than straightforward fee increases under the current structure.
This tricky situation is often what leads some pundits to call for investment in new technologies, which might make these challenges easier to avoid or less painful to deal with. Those solutions aren’t free, either. New road capacity or power generation is expensive, and the cost to create that capacity must be borne by someone — usually the taxpayer. Research into new technologies is costly, as well; if we want to do a significant amount of it, we’re going to have to spend tax revenue or otherwise divert consumer spending.
There are no free lunches. The bottom line is that many of the public goods we take for granted are scarce. We have been paying too little for those goods for too long and have, as a result, built our lives around unsustainable overuse of our resources. To begin to address the environmental challenges we face, we need to include demand reduction strategies.
While such strategies are seen as politically unpopular, their adoption is not wholly inconceivable. Central London has been able to solve its traffic congestion difficulties through the introduction of a congestion charge, and New York City is interested in following suit. Pricing schemes or rate increases can work, so long as leaders understand that they cannot continue to promise costless solutions to their constituents. The sooner we begin charging ourselves appropriately, the more money — and more crises — we will save ourselves down the road.