Freshwater in New Zealand (1) – Free or valuable?
Economists have said that water is a ‘free good’ because access to it is readily, or freely available. It is not scarce, it is not possible to exclude non-payers access to freshwater and so a resource rental cannot be charged for its consumption or use. That may have been the case in some situations in the past, but water is becoming increasingly scarce around the world. Potable freshwater used for supporting life should, if possible, be free, but water used as an economic resource in commercial production should reflect its addition to the value of production.
Where water to drink is being sold as a luxury rather than a necessity of life the price premium should be shared with the water resource owner. We’ve seen an example in 2017 where Coca-Cola launched in the Chinese market a water brand Valser purchased from Switzerland and sold at 64 yuan ($NZ14.30) for a 750ml bottle of ‘water from the Alps’. A little more expensive than your 750ml bottle of Pump for $3.50 or less. Even if it is shipped from Switzerland, we doubt that a price of $14.30 is justified economically.
Where relevant, payment for the water should cover the costs to maintain and enhance the resource, namely the supply of potable freshwater.
Our research in this area over the years has shown that in some uses the water is able to generate supernormal profits for its users, and where market conditions allow, this should be able to yield a return to the water resource’s owner, usually the Crown, or Treaty partner. The economic term for this payment is a ‘resource rental’. It is directly parallel to royalties paid for minerals extracted, and for concessions for operating tourism, accommodation and recreation businesses on Department of Conservation land.
It is surprising that the concept of a pricing regime for supply of water has not received comprehensive investigation earlier as part of the ‘free market’ release of the economy from its pre-1984 straitjacket. Who now can conceive that pre-1984 a range of things were bought and sold according to a periodically surveyed cost-of-production price. These products ranged from four-by-two timber, to wheat, and wine-grapes. With transport, the rail service was protected so freight was not allowed to be carried by road for more than 50 miles (80km). No wonder water was free!
The purpose of this current BERL initiative is to outline the water resource situation in New Zealand, to generate some ‘taxonomy’ structure to the range of uses, and identify uses for which water can be valued and/or charged for. We can then later explore practical methods to estimate and negotiate a value for water in situations where a resource rental is warranted and charging is feasible.
In this series, our next article describes the big picture of what our annual water quota could be in the global context. We also provide a perspective of where New Zealand’s water endowment sits compared with water in other countries.
The third article in the series will describe how the three main sectors using water in New Zealand; domestic, agricultural and industrial have changed the amount of their freshwater withdrawals over the last 30-odd years.
We will then look in more detail at the various ways freshwater is used. We have identified about 20 types of use. Of these uses, we think there are at least five types of uses or users which could or should reasonably be expected to pay a resource rental for their freshwater, reflecting the value that is economically justified.