Tuesday, May 26, 2009

Drought and Smart Water Pricing

Dear Los Angeles DWP,

I would like to suggest a new incentive structure that will simultaneously
raise revenue for your organization and end the "water shortage" in Los Angeles.

Scrap your strange current tiered water pricing system and replace it with the
following simpler tiered water pricing system.

Choose a bimonthly quantity of water that each household should be allowed
to purchase cheaply. This will protect the poor. Suppose that each person
"needs" 10 gallons of water a day. A family of 4 will need 10*30*4*2 = 2400 gallons every two months. Charge them .05 per gallon, so they will pay $120 every 2 months for water.

For anyone who wants to consume more than 10 gallons a day, they pay 40 cents a gallon for every gallon once the household meter exceeds 2400 gallons on a 2 month billing cycle.

Unlike your current pricing scheme, my scheme treats everyone equally. It guarantees that the poor do not lose their right to water and it creates the right marginal incentives for "water hogs" to think about ripping out their grass and economizing on their water consumption. Your current incentive system encourages sprawl, big lots and lots of grass and golf. As a green economist, I certainly don't like any of these.

I believe that my proposal would be a progressive public policy that would redistribute income from the rich to the poor and would protect the environment.

With your current incentive scheme, the average price of water per gallon per square foot of land is lower than the average price per gallon per household.

Consider the following weighted average. Suppose that there are two households who each live in 8 thousand square foot yards. Calculate their total water bill if each consumes X gallons of water. Now suppose that one household lives on a 16,000 square foot yard and consumes X gallons of water while the other household consumes 0. Given your current formula, total water expenditure would decline despite the fact that the same amount of water (X) is consumed in each case.

I realize that you want to encourage sprawl and big grassy yards but I understand your formula!

best regards, mk