NCPA - National Center for Policy Analysis

Market Pricing For Water, Electricity

August 17, 1999

When regulators "protect" consumers from the true costs of water and electric power generation, the result is intermittent scarcities -- leading to water rationing, and brown-outs and black-outs. Economists say such consequences are inevitable whenever bureaucrats seek to avoid market pricing.

  • Had water prices been allowed to fluctuate depending on supply and demand, the Northeastern states could have avoided shortages even during the present drought -- along with government-imposed bans on water usage, they say.
  • Because many of the facilities that generate electric power during periods of peak demand are used only 10 to 14 days per year, owners need to cover a year's worth of depreciation and capital costs all at once -- making electric power during demand peaks incredibly expensive.
  • Last summer, for example, power-production costs reached $7.50 per kilowatt hour in some parts of the Midwest.
  • Likewise, the heatwave just last month drove the marginal cost of power in the Pennsylvania-New Jersey-Maryland area to 94 cents per kilowatt hour.

Yet consumers were shielded from these market realities and continued to pay 5 to 7 cents per kilowatt hour.

Consumers have had no trouble adapting to marginal pricing of long-distance telephone service. Why, economists ask, should water and electricity pricing be any different?

Source: Jerry Taylor (Cato Institute), "No Water? Blame the Government," Washington Times, August 17, 1999.


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