State of the Planet

News from the Columbia Climate School

Water for Profit?

I’ve long been fascinated by the concept of privatization of water.  I can think of few topics related to natural resources that are so controversial.  I tend to reject the claim, espoused by many including former Water Center speaker Maude Barlow, that water is a basic human right and therefore should never be private.  While water itself may be free, water supply  infrastructure costs money to build and maintain.  Someone needs to pay for this, and in general free markets are better at collecting and allocating capital than governments.  Witness only the decrepit state of many municipal water systems in this, one of the world’s most developed countries, as proof of the challenges of maintaining water infrastructure.  I’ve also taken enough economic classes to understand the theory that markets promote the most efficient use of a resource.

On the other hand, I also recognize the inherent challenges in essentially turning the free market loose on a resource as valuable as water.  A great New York Times article on Sunday clearly showed what happens when water privitization runs amok.  Quillagua, Chile is known as the driest place on earth.  However, for years the town was able to prosper, until the late 1980’s when a new water rights regime went into effect and private industry bought up the majority of the water rights in the region,  decimating the amount of clean water available to the town.  Evidently Chile has one of the least regulated water rights markets in the world.  While proponents of this system indicate it puts water to the “highest economic use”  it also causes human suffering and leads to intense environmental degradation, as shown in the case of Quillagua.

 The classic problem in resource economics of how to value items that don’t have an obvious monetary cost (such as a river running dry or polluted drinking water)  is in full effect here.  How can you value the costs and benefits and determine “highest economic use” when only the benefits are really quantifiable?

The economic crisis of the last 6 months has caused even true believers in free markets to question the viability of an economic system without regulation.   The fact that unfettered capitalism can lead to so much suffering in the financial markets certainly indicates the system shouldn’t be turned loose on our most valuable natural resource. On the other hand, a highly regulated system promising “free water for all” is equally likely to lead to disaster.  I don’t know what the answer is, but it seems likely that some type of hybrid which harnesses markets while recognizing their limitations is necessary.

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Meaghan Daly
Meaghan Daly
14 years ago

Dan, you have a good point – markets can’t solve all the problems. It’s important to remember that while markets are great for maximizing economic efficiency, the social benefit often suffers – and human welfare along with it.

Also, it’s necessary to consider that when failures occur, markets can be extraordinarily inefficient – as was the case in Chile. Because there is no substitution for water, this will always be common occurrence. What we need is a system that can regulate the market to the extent that such failures aren’t allowed to run rampant.

I agree whole-heartedly with your assessment!

Robert Goldstein
Robert Goldstein
14 years ago

Really interesting.

msc2161
msc2161
14 years ago

Another relevant consideration is the culture into which the market is being forced – sometimes the word “market” alone will scare people away from cooperating with international institutions geared for the implementation of efficient allocation mechanisms.

Katie Johnson
Katie Johnson
14 years ago

How could privatization affect water supply and distribution in the event of free-market economic collapse? Could we potentially find ourselves in a situation where the government is bailing out the water industry??

Brad Hestir
Brad Hestir
14 years ago

You repeat the mantra “and in general free markets are better at collecting and allocating capital than governments. ” This argument is often repeated, but I have never seen it demonstrated. There are many examples of instances where the commodification and privatization of water have brought economic, social, and health damages to communities. The only efficiencies that one sees in the private sector are those of making a profit at the expense of the common good.

You go on to make the comanion assertion that the poor state of public systems in the USA proves the inefficientcy of governments. You ignore the fact that this state of affairs is the result of decades of assault on public resources by the same private interests. I don’t know who funds this web site, but I doubt that it would function “efficiently” without some backing.

Lets have an honest discussion of all of the issues.

Dan Stellar
14 years ago

Interesting comments, Brad. I essentially agree with your concerns about the privatization of water, and I don’t argue for that as the only answer. Indeed, the Chile example cited in the post illustrates some of the problems with near total privatization of water resources.

On the other hand, I wouldn’t say that the “ONLY efficiencies that one sees in the private sector are those of making a profit at the expense of the common good.” The efficiency of markets is demonstrated by countless economic theories, and has been supported by any amount of evidence. For example, in the early 1980’s the US began to systematically deregulate the trucking industry resulting in benefits such as falling costs in the shipping industry, lower barriers to entry (and greater competition) and improved service. I think it’s safe to say this deregulation is generally regarded as a success.

I’m all for an honest discussion, but part of that is acknowledging that market systems have their strengths, and when harnessed correctly can be an important tool in managing natural resources.

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