What Are The Options To Meet Increased Demand When We’re Running Out Of Water?

The ‘diamond-water paradox’ was first thought of by the 18th-century social philosopher and political economist Adam Smith. Its relevance is felt more than ever today. Smith looked at the economic value of diamonds versus water. Even though water is essential for life and diamonds are not, economically, diamonds are treated as far more valuable. The reason for this is because of their scarcity. While water is plentiful and easily accessible to everyone, diamonds are few and far between, which is why they come with such a high price tag.

It is therefore reasonable to expect that, as water becomes scarcer, it is going to demand a higher price point. One team in the BBC series The Apprentice experienced this for themselves in a recent task. After organising a company awayday in the Dubai desert, they found themselves in hot water when they realised they hadn’t ordered enough drinking water for their clients. The catering company was the only source of water for miles around and, rather unsurprisingly, charged them double the usual price of their bottled water. Needless to say, the team lost the task.

We’re happy to pay more for rarity

This anecdote simply proves the diamond-water paradox - when something is in short supply, it will cost more. And in times of greater water scarcity in the future, this will probably mean businesses will have to pay more for their water, and this will encourage us all to become much more water efficient. Research undertaken in Utah found that for every 10% increase in water rates there was a 6.5% decrease in water usage.

But while this method works, it is not equitable. So rather than a blanket rise in water prices, different pricing models have been put forward to encourage companies that are bigger water users to take steps to save water, without necessarily pushing prices up for low users.

Using pricing to manage the demand for water

As a working example of using variable pricing to manage water demand, the Fairfax County Water Authority in the USA issues Peak User Charges as a way of reducing water consumption. The surcharge only applies between June and November and is calculated based on winter usage. This goes some way to addressing the inequity of raising water prices for all users at peak times, by targeting only those users who use more. When the peak-use surcharge was first introduced, there was a reduction in the proportion of water sold at peak times from 8% to 3.8%.

Drought pricing

In 2020, Sydney Water in Australia introduced a new drought pricing structure that was designed to encourage people to conserve water to help reduce the environmental impact of drought. Customers now pay an ‘average weather’ price for most of the year, but when the water levels of dams fall below 60%, the price increases. This is to encourage people to conserve water when water is scarce.

Customised pricing

An opinion piece recently published in The Conversation has suggested incentivising people to use less water through customised water pricing. It was co-written by an economics professor and an engineering professor who acknowledge the difficulties of simply raising prices because of the harm it would cause low-income households. They put forward a customised ‘opt-in approach’ to encourage richer households - who are traditionally greater water users - to do more to save water. They suggest a pilot programme in which high-water-use households are paid an annual fee for participating in the scheme, in return for water that is charged at triple the current rate. This would provide a clear incentive to use less water, and it would provide data for the water companies on estimating the benefits of customised water pricing on water conservation.