More on justifications for water price increase

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

I published a reply to Colin’s comment on my justifications for water price increase in The Online Citizen on 2 March, Colin published a further comment on 3 March arguing that all my points are ‘bullshit’.

I reply herewith.

Colin challenges my point that ‘the announced increase [of 30%] will be less than catching up with inflation’, saying that ‘core inflation increase since 2000 is 29.959%. It hasn’t exceeded 30%.’ I checked his source [MAS core inflation index] and found the general price index of MAS core inflation for Jan. 2017 to be 102.253 and that for Jan. 2000 to be 77.450, giving the cumulated inflation rate for the past 17 years to be 32.025%. However, as the difference is not much one way or other, I think we may agree that the 30% increase just about matching inflation.

When I use ‘inflation’, I refer to the increase in the general price level, as consistent with general usage, not to the increase in the costs of water supply alone as calculated by Colin. I will thus ignore his figure of 15% as not relevant to my point.

On the constant encouragement on saving water, Colin may be right that ‘our radio stations are government owned and broadcast what the government wants the people to hear’. If so, this should support my point that water is underpriced and the government does not want people to consume more water. Also, according to Mr Heng Swee Keat, Minister of Finance (from his Parliamentary debate reported on newspaper on 3 March), water revenues can only cover operating costs, but not enough for infrastructure investment. This also suggests underpricing.

Colin mentions that ‘for economic efficiency, water should be priced near its weighted average cost of production’. Actually, it should be priced at the ‘long-term marginal cost’, as Mr. Heng also mentioned. According to basic economics, the inefficiency of monopolistic restriction of output (something Colin mentions) is due not to pricing in accordance to marginal instead of average cost. Rather, it is due to equating marginal cost not to price, but to marginal revenue. Even under the simple perfect efficiency case of perfect competition with no other complications, we have prices equaling marginal costs. Under this simple case of perfect competition, we have marginal cost equaling average cost also.

Going beyond the simple case, taking account of the fact that water supply typically has increasing costs (as cheap sources are used up first before exploring more expensive alternatives), the long-term marginal cost may well exceed the average cost significantly, as I analysed in the Australian Economic Review 1987. This paper also shows that I supported higher water prices 30 years ago for Australia and generally, not just for Singapore now to please or defend the government. Similarly, I supported (limited) population increases also more than 30 years ago; my paper on this in an A* journal was published in 1986.

Again I did not become a pro-population person only after the 2013 Population White Paper in Singapore.

True, most prices and charges seldom go down. This is due to general positive inflation. It is economically better (facilitating easier inter-sectoral adjustments) to have a moderate rate of inflation of around 2-3% instead of deflation; witness the desperation of Japan in trying to get out of deflation over the last decade or so.

If we did not have higher water prices now, the taxes, charges, prices we have to pay for other things would be even higher. Thus, efficient higher water prices (and COE prices in particular) help to lower prices elsewhere in this relative sense, even if the actual nominal prices do not come down.

I did not ‘flips arguments like flipping roti prata’; even though many European cities have higher water prices than Singapore in either absolute terms or relative to income levels, they may still mostly underprice water, in relation to efficient long-term marginal costs. This is at least partly due to the popular conception of water as mainly an essential good. I pointed out that drinking accounts for only a fraction of 1% of total water consumption.

I mentioned that ‘a larger population actually helps to lower the average cost of large investment in desalination’, not the average cost from all sources added together, making Colin’s calculation not relevant to the point. I was focussing on the large fixed cost of a desalination plant. This acts like a public good. Like defence, a doubling in population roughly half the per-person cost of maintaining defence at the same level.

‘As more people fight for the same amount of limited resources, prices go up for all.’ However, the higher prices are bad only for those not yet owning substantial assets (especially flats). Most, if not all the higher prices are received by the pre-existing Singaporeans or their government. Singaporeans as a whole group would benefit from a higher population, even ignoring the huge benefits of lower per-head costs of defence, research, broadcasting and other public goods.

On the popular mistaken negative views regarding population, please read my 1986 paper mentioned above, and ch.1  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” )

I mentioned that ‘I donated S$50,000 to animal welfare causes’ over the last 12 months alone, in response to the accusation of being ‘unfeeling’. But then I received a message accusing me of ‘care more for animal welfare than the welfare of your fellow [human] beings’. Though I did not mention it, actually I donated much more to human causes; just in last October, I (together with my wife) donated $100,000 to the Chinese Heritage Centre alone (again receipt available upon request; I emailed it to the accuser). I could be accused of human-biased (or homocentric to some extent), not of caring less for humans.