Monday, April 7, 2008

Inside, outside, Holiday Inn

Sarah and I were going to look at an apartment this weekend (we ended up not even getting to see it because someone else took it before we got the chance) that was an "eco-renovated" brownstone, everything redone with sustainable materials and designed for efficiency and conservation. E.g., they had the toilets common throughout the rest of the developed world where you get one little flusher for pee and a bigger flusher for poo.

I was pretty psyched about the possibility of living someplace like that. I find something satisfying about efficiency. Must be my Germanic ancestry. With my current landlord, getting storm windows to replace the paper-thin panes in the living room was a huge coup, and we lobbied for months trying to get him to fix a leak in the bathtub was wasting gallons and gallons of potable water, but even though he paid the water bill, it wasn't costing him enough to justify hiring a plumber.

And of course, he was right; even if we had succeeded in getting the leak fixed, there's doubtless a dozen other leaky taps in the building and a hundred among the rest of the buildings on the block. If it's not worth fixing to him then it's not worth fixing to anybody, and taking care of our tiny leak would literally amount to a drop in the ocean.

A small minority of building owners, like the landlord of the building we wanted to look at this weekend, are sufficiently opposed to wasting water on principle that they would keep things leak-free, but that's ultimately not a rational decision based on sound economics. The question is, how do you change the system so that the people who are deciding things rationally make the choice that we want, which is to prevent so much wasted water?

In economics terms, the rational decision to let water go to waste is the result of an externality: wasted drinking water has a certain cost to society that is not fully represented in the dollar cost of tap water to the person paying the bill. This is why communities experiencing drought need to enact ordinances against watering your lawn: if water prices in those communities accurately reflected the marginal cost of water to the community as water became more scarce, then pretty much everyone would decide to stop watering their lawn all on their own; but since water, as a basic requirement for living, is subsidized, there's no price signal to respond people and you have to tell them explicitly "don't do that, we're running out of water."

Dealing with externalities wisely is like driving a boat or building a bridge: if you can set things up so the prevailing winds or gravity do a lot of the work, then there's a lot less for you to handle yourself with paddles or poured concrete. If you can manipulate prices so that the market does the heavy lifting to conserve precious resources or whatever, then there's a lot less left over to clean up with regulation.

What the case of water-wasting tap leaks made me realize is that the easy way of internalizing externalities in the case of conservation of resources—imposing a "Pigovian tax" somewhere along the line—sort of falls apart when you're talking about a resource that you want everyone to have essentially unhindered access to as a matter of rights.

It's simple enough to raise water prices to the point where most landlords will start looking after their plumbing. But as soon as water is priced anywhere above a nominal level then you'll have people going unwashed (the masses will basically go unwashed at the drop of a hat), letting their gardens dry out, and drinking inadequate water to stay healthy. And slumlords will just let their taps leak away and make their tenants responsible for the water bill. Basically, by trying to internalize one externality you end up creating another.

Which is just too bad.


DU said...

THEORETICALLY you could keep prices the same for some "reasonable" amount and then raise the prices on the extra and/or waste.

So your landlord would pay a "water is a human right" price for all the water to the building but pay through the nose for all the leaks. That's basically how luxury/sin taxes work, but applied here to waste.

I'll let you hammer out the details of how that would work.

tps12 said...

True. I'm really pretty ignorant regarding how this stuff works, but I gather that that's actually how ConEd billing works for power in NYC. I know I pay a lower flat rate because my apartment has electric heating, but for most people the rate increases the more you use.

DU said...

Actually, there's a more general approach too: Let the All Powerful Free Market figure it out.

Tell supply companies two things:

1) The normal usage rate for each person is X.
2) Each person must be able to purchase X amount for a reasonable total price.
3) The company is responsible for all externalities.

Sort of a let the seller beware system. Corps have been giving us this exact same deal for decades, so what's the problem?

DU said...

Tell them a third thing too: How to count.