Friday, 8 April 2011

Prices prices prices

Post-quake Christchurch is hardly back to normal. Here in the eastern suburbs, we're warned that excessive power consumption will result in blackouts; we have to curtail power use. Fortunately, the folks in the eastern suburbs are also the ones more likely to be running woodburners or old illegal coal burners (yes, I do smell it driving around from time to time), so they're more likely to have options. And everyone in town is warned against letting too much water go down the drains lest the sewage treatment plant overload and be turned into a cesspool that can't be fixed for months.

Prices can help solve one of these problems.

It can't help with water, at least not with current infrastructure. While we all have individual water meters, they're only read about once per year and manually. In an ideal world, we'd have electronic metering with per unit pricing. In that world, the solution on water would be pretty simple.

Step one: figure out how much water each household used last year from April through to October (or whenever they think that restrictions will have to last until).

Step two: multiply that number of litres by the amount of a reasonably substantial water price increase.

Step three: give every household a cheque such that if they bought as much water as they did last year, they'd be no more out of pocket than they were last year.

Step four: increase the price of water to the new higher level.

Ta dah! No household is worse off (I will smack anybody who tries to tell me that the scheme above with higher prices hurts the poor) and every household has incentive to reduce water use. The First and Second fundamental theorems of welfare economics in application.

We can't do it for water. We don't have a baseline reading on the individual meters for starters. And I'd be surprised if Council didn't have better things to do than get a whole pile of new water meter readers to go out and check things.

But we can do it for electricity - we've already got monthly (at worst) readings. Double the power prices in the eastern suburbs and give every household in the eastern suburbs a cheque that would leave them no worse off if they chose to use as much power as they did last year. Some of the scheme's funding would come from windfall gains from the power surcharge, but a decent chunk would have to come out of general revenues - ideally from the property tax assessments of folks who get to not have blackouts over the winter.

Whatever arguments you want to make about folks coming together in crises and all pitching in and price mechanisms eroding that goodwill - I can't see that lasting through the winter. Instead the massively public goods nature of power conservation will become blindingly obvious. In anticipation of which, it's time for me to call the chimneysweep to repair some minor earthquake damage inside our logburner.


  1. honestly dude I wish I could understand price theory, I try, but I am just too dumb, all I know is that it is going to be bad, and it is bad, and our lives are belittled, and we are angry, and I do not mean to be offhand with you, but we are just in so much trouble,

  2. Eric's point is that people can substitute goods and be no worse off. A person will respond to a price change so if there is a shortage, the producer should increase the good's price and weed out some of the lowest valued usage.

  3. I like the idea but I would imagine those not in the eastern suburbs might not be so keen. The household immediately after the boundary might find it unfair that when they reduce their electricity consumption, they benefit by half as much. Perhaps instead of definining it by suburbs, you could index price increases to EQC damage estimates or something like that?

  4. @Sam: only raise prices in areas where there are power supply issues, and only give cheques to those households facing higher prices. Everybody else sees no difference.