Water Economics: What Does the Price of Water Tell Us?

By Deeti Shrotriya

Water—the elixir of life and a necessity for all beings on this planet—is a limited resource. It has various meanings and is considered many things: a valued resource, a commodity, a link to one’s community, and a globally shared common, among others. For this reason, various moral questions are raised while treating this resource as an economic good and setting a price on it. Water economics is a branch of economics that addresses the challenges to water pricing and policies that need to be formed to treat water as an economic good. When discussing the economics of water, it is important to first, identify the need to set a price, what factors influence the pricing, what challenges are faced along the way and how to account for them in the price itself. 

Water, like all other economic goods, is a good that all consumers are willing to pay the price for. However, the extent to which this is true for water in comparison to other resources is what makes it different. All goods or services that are necessities have an inelastic demand. This means that the demand for the good, in this case, water, will remain unchanged even if there are fluctuations in its price or other factors that influence demand (like a change in one’s income). One thing both economists and environmentalists can agree on is that currently, the price of water is too low. Due to this,  it is being overexploited in nature and isn’t available to all. From an economic perspective, a resource like water would be commoditized, but cannot be treated as a commodity because it is a necessity. 

Instead of paying a market price for water, most consumers pay a regulated price established by the regulator – in most cases authorities of the government. Hence, water is usually inexpensive, to be made available for all. The average cost of water is determined by dividing the total private water supply cost by the volume of water delivered. While the capital costs of supplying water for centralized distributed water supply systems are sometimes very high, these expenses are typically spread out across a vast volume of water delivered, resulting in a comparatively low average cost.

Why is the price of water so difficult to set? This is because of a multitude of reasons, its price is dependent on its demand and is decided by geographical region, supply depending on region, seasons, quality, quantity and ownership rights that depend on the area, physical state and other conditions. Another major determinant of water’s price is its heterogeneity. Any fluctuations in these conditions are reflected in the price of the resource. Water exists in different physical states: liquid, water and gas; hence, it has variable quantities and economic values. Fluctuations in its price could exist in the form of price variability that could potentially cause instability in the market.

When discussing the economics of water, it is also important to address the black market, illegal trade and water mafia. The water mafia is especially prevalent in India, in cities like Hyderabad with high water insecurity and shortage. The water mafias have established a monopoly on the distribution and overexploitation of the resource. These water traffickers exploit the limitations of the official supply system in India’s poorest communities to build a black market. This has a long-term impact on the environment, communities and price. Illegal extraction of groundwater-depleted resources works against the ideology of sustainable development and makes the limited resource even more scarce. 

In most communities and regions of the world, water is given an intrinsic value given that it is a necessity for life. However, despite this value, it is exploited and mistreated. Thus, assigning an economic value to it is essential. Safe drinking water is a human right, and it also assists us in maintaining food security and protecting critical ecosystems that the world relies on. Setting a correct price on water would include accounting for all discussed challenges while assuring long-term equity of the resource to promote sustainability in all domains.

It is essential to appropriately evaluate and price water as in the long term, it aids sustainable development, preventing misuse of resources and equity in water distribution. Appropriately pricing water minimizes water scarcity. Since water is a necessity, its economic value and intrinsic value are extremely high. The economic value of a good is the measure of benefit that the good provides to the people. Therefore, the price set on the water does not embody its value appropriately. It is usually underpriced so as to ensure its equity in distribution. Water being underpriced is the reason that it remains so exploited in our world today in turn, causing overexploitation of the resource and ‘tragedy of the commons’. This may exist in the form of water contamination, water politics, water waste and mostly, water misuse. 

Combining economics and environment, and using economic tools to solve environmental concerns is one of the most effective ways to address concerns like these. Policy-makers around the world are struggling with how to provide a stable supply of water services today and in the future while maintaining fundamental human needs and increasing the surplus for communities. For example, in 2010, the General Assembly of the United Nations declared the right to water and sanitation to be a human right (HRWS). It is a philosophy that affirms that access to safe drinking water and adequate sanitation is a fundamental human right that should be protected at all costs, however, 2.1 billion people worldwide do not have access to safe, easily accessible water at home, and 4.5 billion do not have access to well-maintained sanitation. This indicates the lack of incorporation and effective implementation of this right on a national level. Effective implementation and incorporation of this right would not only involve forming decisions about water supply maintenance and development, but also making economic considerations about how to price water in ways that are sustainable, efficient, and equitable.

In the future, with a rising population, the water demand is only going to increase, due to changes in lifestyle and an increase in agriculture, and infrastructure. There is a need to create balance for water demand. All major industries depend on water as raw material, for example, the agricultural industry relies heavily on water and is a necessity for the human population; complications in water supply and scarcity impact this industry, impacting us in the form of food security concerns. Additionally, people tend to reside near river basins, where water supply is ensured. With an increase in population in the near future, these settlements will start to increase, increasing the pressure on water supplies, overexploitation and polluting them. The solution lies in people paying for the water that they are using and paying for cleaning up the water that they are polluting. This promotes innovation in the form of newer techniques developed to treat water, reduce wastewater generation and keep water correctly priced. 

Deeti Shrotriya is a second-year undergraduate student pursuing a B.A Hons. Environmental Studies at O.P. Jindal Global University

Image credits – The Hindu

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