Economics 101: Price Ceiling Causes (Water) Shortages!
From the Inquirer: “Consumer demand for water bigger than supply since 2016” (March 13, 2019) [bold mine]
Manila Water Co. Inc. on Tuesday said that the prevailing water shortage was due to the yearly hike in consumer demand despite the fact that its allocation of raw water from Angat Dam had remained the same.
Geodino Carpio, Manila Water chief operating officer, told reporters that while the National Water Resources Board (NWRB) had allowed the company to draw 1.6 billion liters every day — or 1,600 million liters daily (MLD) — from Angat, its customers were now using an average of 1,740 MLD.
“Demand has been increasing yearly since we started with the concession 21 years ago,” Carpio said, adding: “In 2016,demand surpassed the volume of our daily allocation from Angat.”
He explained that demand from Manila Water customers had gone up by around three percent yearly. In terms of volume, this translated to between 40 MLD and 50 MLD.
La Mesa Dam’s own store of raw water — that which does not come from Angat via tunnels and aqueducts — provides Manila Water a buffer stock, but this amounts to only 50 MLD.
“And even if the NWRB would increase our supply of raw water from Angat, the existing conveyance could transmit only 1,600 MLD,” Carpio said.
Currently, there are three pipes and six aqueducts that transport water from Angat to La Mesa.
If rising demand signified a trend, why has supply not aligned with demand? What happened to the equilibrating role of prices? Has this been representative of a “market failure”?
First, how are water prices set?
Pursuant to the Concession Agreement (CA), a Rate Rebasing (RR) is mandatory every five (5) years. RR is a process that determines the level of rates for water and sewerage services that permits the Concessionaires to recover over the life of the concession (until 2037) its operating, capital maintenance and investment expenditures. RR is also a way to provide appropriate incentives to benefit both the Customers and the Concessionaires.
The RR looks into the historical (past 5 years) performance of the Concessionaires against established targets or commitments. It then updates a reasonable projection of all factors for the remaining concession life with a proposed Business Plan detailing the next five years. The Business Plan needs the approval of the MWSS being the principal and eventual owner of all the facilities by the end of the concession. As required in the CA, both Concessionaires submitted their respective Business Plans for 2013-2037 within the deadline of March 31, 2012.
Water rates are implemented only after they are presented in a public hearing and after review and approval by LWUA
The crux: water rates are DETERMINED by regulators.
Next, with the politicization of water prices, the coordinating and equilibrating role of prices have been impeded or disrupted.
As such, supply has been SLOW to ADJUST to demand changes.
Besides, business plans, submitted to the government, are typically based on the past. Complexities like abrupt changes in weather, price inflation, and others, which are typically unforeseeable, render such plans unrealistic.
Most importantly, as a basic commodity, water priced below the market rates operates in the interest of the political institutions influenced by the popular rule.
That said, to regulate water, authorities resort to an implicit price ceiling.
Price Ceilings are maximum prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them. Price ceilings only become a problem when they are set below the market equilibrium price.
When the ceiling is set below the market price, there will be excess demand or a supply shortage. Producers won't produce as much at the lower price, while consumers will demand more because the goods are cheaper.Demand will outstrip supply, so there will be a lot of people who want to buy at this lower price but can't. Still, if the demand curve is relatively elastic, then the net effect to consumer surplus will be positive. Producers are truly harmed, as their surplus is doubly hit with a reduction in the number of firms willing to take that lower price, and those who remain in the market have to take a lower price.
See, imbalances reveals how the politicization of water prices cause shortages!
Economics 101!
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