NCPA - National Center for Policy Analysis


July 6, 2006

Rainy, cloudy, foggy England is under drought orders.  The government has announced that London and southeast England have less water per person than Sudan.  Yet this is a case of economic, rather than drought, says Rupert Darwall of the Center for Policy Studies in London.

The problem is the absence of prices.  Consumers are charged for the pipes to their houses, but not for the water they use.  Similarly, water companies do not pay for the amount of water they draw from rivers and boreholes.  With no prices for water going into the system, and no prices when it comes out, the Economics 101 lesson that there would be no incentive to increase supply turns out to be correct, says Darwall.

  • Since the water industry was privatized in 1989, not a single new reservoir has been built.
  • Meanwhile, over the last two decades, household water consumption per head in fast-growing London and the Southeast has increased by 22 percent.
  • The water companies' biggest customers are leaks since an estimated 30 percent of London's water disappears through holes in the network. No one does anything about it, because the lost water has no automatic impact on profits.

But if the water companies have been privatized, how is this a state-caused problem?  The lack of prices reflects the industry's public-sector origin.  When it was privatized, water metering was recognized and encouraged as part of the answer.  Yet one of the first actions of the Blair government was to curb its spread, says Darwall.

Source: Rupert Darwall, "Can't-Do Britain," Wall Street Journal, July 5, 2006.

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