TL;DR – Putting what we learn in school to some use.
Ok, if you have never taken a single class of economics, you might want to skip this article. Maybe this one about Fiona Xie’s new beau will interest you.
If you have done some economics in school or understand some basics, then I think you would want to read Facebook user Donald Low’s economics 101 effort at explaining the recent water price increase.
Here’s a cheatsheet for those who don’t want to read the whole thing:
1) Difference between AC and MC
- The average cost (AC) is simply the total cost of production divided by total output.
- The marginal cost (MC) is the increase in total cost that arises from producing an additional unit.
2) The marginal cost of producing water in Singapore is higher than the average cost of production.
3) PUB prices water using the marginal cost of production and not the average cost because it is more efficient in terms of economics.
4) As our population increases, PUB will have to adopt more expensive technologies and the incremental costs far outstrip PUB’s average costs of production.
5) This begets the question why long run marginal cost (LRMC) and not short run marginal cost (SRMC)?
The answer being this would allow PUB to plan for long-term investments knowing that such investments would be (partially) financed by the water tariff.
6) This then brings about the next question of why we have a water conservation tax (WCT) if the water tariff already prices water correctly?
The quick answer is that it helps to ensure that their consumption of water is socially optimal.
7) Lastly, economists are not assholes.
Instead of distorting prices or to depress prices artificially, it is better to provide the poor or disadvantaged with direct cash transfers. Therefore when it comes to water pricing, the right approach should be to price water correctly and to help the poor directly through water rebates.
(Cover image adapted via)