Prof Ng (Photo - Economic Society of Singapore)

A reply to “False justifications for water price increase”

By Ng Yew-Kwang, Winsemius Professor in Economics, Nanyang Technological University

An article by Colin in ‘The Online Citizen’ argues that my justification for the recently announced 30% increase in water price is false/wrong, partly because the media reports on my interviews were rather brief. I also received emails accusing me of being ‘unfeeling’, ‘disgusting’. I have time to outline only a few main points below.

I also received emails accusing me of being ‘unfeeling’, ‘disgusting’. I have time to outline only a few main points below.

As water prices have not been adjusted since 2000, and general inflation has exceeded 30% over the last 17 years (though negligible if not negative over the past few years), the announced increase will be less than catching up with inflation.

Water prices in Singapore compare favourably to European countries even as a proportion of per-capita incomes. True, water is much cheaper in Beijing. But I drink water in Singapore straight from the tap; dare I do this in Beijing?

I have frequently heard suggestions on the need and the methods to save water on radio. I seldom or never heard the need to save other goods. Why?

A likely reason is that water prices do not adequately reflect the costs of supply. Colin mentions the absence of cost increase from the Malaysian supply.

However, Singapore also supplies water by producing new water and by desalination (converting sea water into drinkable water). The costs of these supplies are much higher. At least from the viewpoint of economic efficiency, a good should be priced at the cost of the highest cost source, to encourage efficient saving. If the government makes money by this policy, such as it presumably has in its COE auctioning, it could then levy lower taxes on other areas, or have higher government spending on worthy avenues. As long as the government is efficient and not corrupt, the overall result should be better.

Most cities/countries underprice water, resulting in wastage and the need to urge people to save water and sometimes even in severe water restrictions. These create unnecessary costs and inconvenience. Much better to increase water prices.

True, water is essential for life. Everyone has to drink about 1-2 litres a day. However, this represents only about 0.5% of our daily consumption of water per person. 99.5% is used for less essential usages, not to mention much wastage.

True, the 30% increase, though trivial to a rich person, may impose significant burdens for people on low incomes. I also mentioned to reporters of the need to help them. The government also uses rebates in accordance to flat sizes to cushion the increase. Ideally, we should use income per-capita levels, but information may not be adequate.

Everyone, rich or not, should face the full costs of supply to achieve efficiency. The problem of inequality in income/wealth distribution should be addressed by the overall equality promotion policy, including taxing the rich more and helping those on low income levels.

To understand why this is a more efficient policy to achieve any degree of equality, please read my paper in the American Economic Review 1984, or Ch.9 of my following open-access book, “Common Mistakes in Economics: By the Public, Students, Economists, and Nobel Laureates“. (Chinese Version: “从诺奖得主到凡夫俗子的经济学谬误“)

The reported parts of my interviews may give the misleading idea that I do not care for the low-income groups. I am certainly not unfeeling. I feel even for animals, not to mention fellow human beings, especially the lower income groups. As a student, I was a left-wing activist.

Over the last 12 months alone, I donated S$50,000 to animal welfare causes, despite being not tax-deductible in Singapore; receipts available upon request. For more evidence of my concern for animals, please read my following articles* (links provided below) on animal welfare.

Colin also mentions the role of population increase in increasing water prices. This is another popular source of fallacies (discussed in the above open-access book, Chapter 1 and 10).

Unless our population is so small as to rely only on the Malaysian supply, a larger population actually helps to lower the average cost of large investment in desalination.

More importantly, especially for Singapore, a larger population lowers the per-capita costs of such public goods like defence, research, and broadcasting. Even ignoring public goods, a larger population (including from immigration, as long as social harmony is maintained) actually makes existing people economically better off, as immigrants in general cannot take away assets owned by existing people or the government without adequate payment.

With lesser people, the MRT could not have so many lines; the frequency of trains and buses would also be much lower. I lived in the old Nanyang University campus (same location as NTU now) as an undergraduate when the population of Singapore was less than 2 million. When we missed the only bus out of the campus, we had to wait half an hour.

Now, I also live inside the NTU campus and have occasions to catch the 179 bus. Once, just before reaching the bus-stop, I saw two 179’s passing. I thought I had to wait at least 15 minutes but the next 179 came in less than two minutes. This typifies the advantage of a larger population that most people ignore.

*Articles on/by Prof Ng in regards to animal welfare