By Ng Yew-Kwang, Winsemius Professor in Economics, Nanyang Technological University.
I published a second reply to Colin’s comment on my justifications for water price increase in The Online Citizen on 4 March, Colin published a further comment on 7 March arguing again that all my points are ‘bullshit’. I reply briefly herewith for a final time, as I do not have time to prolong the debate and as most of Colin’s points are clearly faulty to those with some basic logic and economics.
Though the fact that water from Malaysia has not increased in price/cost to Singapore is relevant for determining the average cost of water supply, it is not relevant for determining the long-term marginal cost. And it is efficient to price water at this long-term marginal cost; this is certainly not seriously flawed as Colin asserts.
Though the long-term marginal cost depends also on the demand situation, this could be roughly estimated from our experience of actual water consumption and some reasonable projection of such factors as population increase. Also, as we are well beyond the 0.5% level of water consumption, our demand for water cannot be price inelastic.
When I refer to infrastructure investment, I refer not to all types of infrastructure, but only to that for water supply. This should be factored in for determining the long-term marginal costs; please see my paper in Australian Economic Review 1987: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8462.1987.tb00669.x/full
Colin argues: ‘The extra money that the government gains can simply go into their pockets and disappear into government reserves only to reappear as losses in government investments.’ This is a serious allegation that seems contrary the high ranking of Singapore in terms of efficiency and non-corruption.
True, a larger population does not only substantially reduce the per-capita costs of supplying public goods like defence, research, and broadcasting, it may also push up the prices of flats and land.
However, these higher prices are largely received by the original owners of these assets, and paid by new immigrants. Existing Singaporeans as a group are not made worse off. Those not having own any such asset may be made worse off (though the parents of many of them are made better off). However, it is better to pursue efficient policies in specific issues (including water pricing) and use the general equality-promotion policies to achieve equality, as I argue in the American Economic Review 1984, or Ch.9 of my following open-access book: Ng, Y.-K. (2011). Common Mistakes in Economics: By the Public, Students, Economists, and Nobel Laureates, Nova, 2011, Chinese Version: <从诺奖得主到凡夫俗子的经济学谬误>.