Thursday, 3 February 2011

The benefits of mis-pricing water

Shanta Devarajan argues, over on Africa can end poverty, that making water cheap - effectively mis-pricing water - is bad. The argument runs something like this:

Water, or at least purified water, is a consumable that, once consumed, cannot be used again (at least in the same way). This means that water costs money. Supplying water to the poor cheaply still costs money. Corrupt politicians are able to divert funds, intended to subsidize water for the poorest of the poor, to their own benefit because they are the ones signing the cheques. So the poor still end up paying for water from vendors who get rich off their misery. Therefore water should be priced at marginal cost for everyone instead of being subsidised. 

I feel as if I've missed a step in this argument (possibly because I have?). Surely the problem here is not that subsidizing water makes the poor suffer but that corrupt politicians make the poor suffer. And if that is the case, it is unclear how charging the marginal rate will prevent politicians from being just as corrupt and still stealing the money that poor people have paid - now at a higher rate - and leaving them in just as much misery.

The analogy he uses to counter the potential criticism that poor people might not be able to afford the marginal cost of water is one of cellphones. While it is absolutely true that market pricing of cellphone services has not prevented the poor from using them, when a poor person runs out of airtime/mobile phone credit, she waits until there is more money to buy more airtime. Water isn't something people can simply wait around until the next bit of money is available, to buy. When people are unable to afford clean water - whether at a subsidised government rate or at an extortionate vendor rate - they use dirty water.

Water may be a private good, but the health, sanitation and quality of life benefits of people being able to access clean water seem sufficient that it makes more sense for governments, even if they have to be pressured by outside groups to do so, to find ways of eliminating some of the corruption so that affordable, subsidised - if possible even free - clean water gets to the people who need it.

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