Water Price Debate: Long run marginal costing turns out to be rough estimate only.

Water Price Debate: Long run marginal costing turns out to be rough estimate only.

By Colin
I refer to the 8 Mar 2017 Online Citizen commentary “A final rejoinder on justifications for water price increase”.
Bullshit 1: Lost debate, just declare opponent’s logic faulty
Prof Ng claimed that most of the points I made earlier were clearly faulty on logic and economics.  But if that were true, then shouldn’t it be very easy for Prof Ng to clearly pin point what exactly were wrong with those arguments?  Yet, half the time we find Prof Ng conveniently sidestepping arguments by claiming they are irrelevant or making half-baked generalisations without substantiations or simply restating arguments without actually addressing counter arguments.
Bullshit 2: No more shouting about 30% inflation
Prof Ng’s original argument was that since general inflation is 30%, water should also be inflated 30%.  When I pointed out that more than half of our water experienced little or no inflation having been fixed at 3 cents per 1,000 gallons since over 50 years ago, which leads to an average water inflation of about 15% only, not 30%, he brushed that off as irrelevant.
This was what he wrote exactly:

“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.”

I maintained my stand that Prof Ng was wrong to insist that the half of our water that experienced little or no inflation be inflated 30% as well.
Prof Ng has now completely changed his story in his latest reply.  From saying 3 cents per 1,000 gallons is irrelevant to general price level, he is now saying it is irrelevant to determining long run marginal cost.  It seems that Prof Ng has capitulated on this original argument and no longer insists on 30% inflation anymore.  How is it possible that someone whose reasoning is ‘clearly faulty’ can succeed in forcing Prof Ng to capitulate on his arguments?
Bullshit 3: Long run marginal costing turns out to be rough estimate only
Prof Ng continues to insist that long run marginal costing is the efficient way to price water even though it was pointed out to him earlier that the market equilibrium price cannot depend on marginal cost only but must require demand curve information too which has been totally lacking in the water debate thus far.
Prof Ng has finally let the cat out of the bag and admitted that he merely ‘roughly estimated’ and made some ‘reasonable projection’ to arrive at the demand situation.  That is exactly as expected.  The long run marginal cost alone cannot constitute the full picture.  All the focus on long run marginal cost is meaningless when we cannot even be certain about the price demand curve for water.  Isn’t it scary the entire nation has been suckered into putting their faith in a water price that turns out to be based on rough estimates only?
Bullshit 4: Water demand not inelastic well beyond 0.5% level of water consumption
Prof Ng claims that water demand is not inelastic well beyond 0.5% level of water consumption. That may not be true.
According to a study by Yale and Harvard researchers (Managing water demand: Price vs. Non-Price Conservation Programs by Sheila M. Olmstead and Robert N. Stavins), price elasticity of US residential water ranges from -0.3 to -0.4.  This means that a 10% increase in marginal price of water only lowers water demand by 3% to 4%.
In another study (Residential price elasticity of demand for water – comparing Cyprus with other countries), researchers obtained average price elasticity of water for various cities/countries as follows:  Melbourne -0.08, Sydney -0.09, a Cyprus city -0.05, Denmark -0.52, Finland -0.41, Turin Italy -0.52, TWM Netherlands -0.36.
Thus, in all these cases, water demand is indeed price inelastic.
More importantly, Prof Ng is completely silent on the argument that the increase in consumer surplus brought about by a shift in the demand curve to the right or up is spurious to say the least when applied to water demand.  If this argument is clearly faulty, why can’t Prof Ng simply demolish it?
Bullshit 5: Only focused on water infrastructure
Prof Ng is only focused on water infrastructure but the government shouldn’t similarly adopt this silo view of our economy but should instead take a holistic view and appraise all infrastructure investments against gains from future industries and businesses.
Bullshit 6: Corruption allegation
Prof Ng claims that the statement “extra money gained by the government goes into their pockets and disappears into government reserves only to reappear as losses in government investments” constitutes a serious allegation of corruption.  That is a silly accusation.  The government makes huge budget surpluses all the time which goes into government reserves and on to government investment vehicles.  This happens all the time and is common knowledge, so what’s there to allege?
Bullshit 7: Larger population substantially reduces per capita costs of goods like defence
Prof Ng continues to harp on his mistaken view that a larger population substantially reduces per capita costs of goods like defence when it has already been pointed out to him that the effect may not be as significant since it is only applicable to capital costs but not necessarily to running costs.  In the desalination example he gave, I provided evidence to show that capital costs is only 30% of total costs so the cost spreading effect would be much greatly reduced.  For example, if our population doubles, the cost of desalination will not halve.  Only the 30% cost is halved to 15% so the final price is reduced from 100% to 85%.  So instead of a 50% reduction in desalination price, we only get 15% reduction, a vast difference indeed.
Bullshit 8: Higher flat price largely paid by immigrants
Prof Ng claims that higher price of flats and land is largely paid for by new immigrants and that existing Singaporeans are not made worse off.  That is not true.  PRs only purchase about 20% of HDB resale flats which means that Singaporeans buy the remaining 80% so an increase in flat price is largely paid for by Singaporeans, not immigrants.

PERMANENT residents (PRs) may buy one in five, or 20 per cent, of HDB resale flats today. [Straits Times: PRs, foreigners form 12% of HDB dwellers, 19 Feb 2010] The new figures released by Mr Khaw looked at the 2,162 HDB resale transactions closed last month.  They showed that a fifth of buyers were permanent residents (PRs), 8 per cent were private property owners and about a quarter – 23 per cent – were newly married couples, or first-timers. – [Straits Times, “Who the resale HDB flat buyers are”, 26 Jun 2011] The PR numbers are in fact not insignificant – it was reported last year that they accounted for 20 per cent of all resale transactions in 2010. [Sunday Times, Avoid Feast and Famine in Housing, 4 Nov 2012]

Bullshit 9: Turning a blind eye to increased indebtedness of future generations
Prof Ng says that although non-owners are worse off when property prices increase, their parents will be better off.  But that doesn’t answer the point I made earlier about the fact that families with many children (say three or more) may end up worse off than before as the combined losses by the many non-owner children in future housing purchases outweigh the present gains by their parents.  In other words, the parents’ gains will be more than paid for by their children in the future.  Property gains by one generation get passed down as debts for the next generation.
Furthermore, parents’ gains are on paper only for unless parents can bunk in with their children or have more than one property or migrate to a cheaper country, they will have to continue to stay in their house and cannot realise their paper gain.  Downgrading depends on parents having a large enough flat to begin with and may not reap much cash considering that proceeds have to go back to CPF first.
Bullshit 10: Pursuance of efficient water pricing through rough estimations
Prof Ng doesn’t feel embarrassed to highlight pursuance of efficient policies in water pricing when his own water pricing turns out to be based on rough estimates only.  How can Singapore be truly efficient in water pricing using Prof Ng’s rough estimated water pricing?

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