What an extra drop of water is worth

If water is paid for on a "measured" basis (the more you use the more you pay), how much should you pay for each extra unit? The economist's answer would be the "forward-looking long-run marginal cost" of providing you with that extra unit.

The key phrase here is "long run", which may be best understood by contrasting it with its opposite, "short run". The short-run marginal cost would be the cost of providing that extra unit of water - the marginal unit - on the assumption that all the physical infrastructure (reservoirs, pumping stations, the network of distribution pipes and so on) is already in place. The long-run marginal cost does not take this infrastructure as given but includes an amount that reflects the cost of providing it. The forward-looking long-run marginal cost assumes that providing additional water may be more costly than providing the current supply if, for example, new reservoirs have to be built in less advantageous locations.

Economists set the price of an extra unit equal to the long-run marginal cost so that companies and customers alike face the correct financial incentive. The customer, in deciding whether to consume more water, pays a price that reflects the additional costs of supplying it. The company, benefiting from the extra revenue generated by higher water usage, will also make the right investment decisions.

So much for the theory: in practice it is much less easy to get agreement about what the numerical value should be. But while there is genuine room for disagreement, there is one reason why we should err on the low side when setting the unit price of water: if the price is set too high, the water companies will make undue profits from each extra unit sold. It would no longer be in their interests to encourage the rest of us to be economical with water (for example, via promotions of new more water-efficient appliances such as washing machines), since this would cause their profits to fall.

This article first appeared in the 26 July 1999 issue of the New Statesman, I took tea with Pinochet

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SRSLY #13: Take Two

On the pop culture podcast this week, we discuss Michael Fassbender’s Macbeth, the recent BBC adaptations of Lady Chatterley’s Lover and Cider with Rosie, and reminisce about teen movie Shakespeare retelling She’s the Man.

This is SRSLY, the pop culture podcast from the New Statesman. Here, you can find links to all the things we talk about in the show as well as a bit more detail about who we are and where else you can find us online.

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SRSLY is hosted by Caroline Crampton and Anna Leszkiewicz, the NS’s web editor and editorial assistant. We’re on Twitter as @c_crampton and @annaleszkie, where between us we post a heady mixture of Serious Journalism, excellent gifs and regularly ask questions J K Rowling needs to answer.

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The Links

On Macbeth

Ryan Gilbey’s review of Macbeth.

The trailer for the film.

The details about the 2005 Macbeth from the BBC’s Shakespeare Retold series.


On Lady Chatterley’s Lover and Cider with Rosie

Rachel Cooke’s review of Lady Chatterley’s Lover.

Sarah Hughes on Cider with Rosie, and the BBC’s attempt to create “heritage television for the Downton Abbey age”.


On She’s the Man (and other teen movie Shakespeare retellings)

The trailer for She’s the Man.

The 27 best moments from the film.

Bim Adewunmi’s great piece remembering 10 Things I Hate About You.


Next week:

Anna is reading Lolly Willowes by Sylvia Townsend Warner.


Your questions:

We loved talking about your recommendations and feedback this week. If you have thoughts you want to share on anything we've discussed, or questions you want to ask us, please email us on srslypod[at], or @ us on Twitter @srslypod, or get in touch via tumblr here. We also have Facebook now.



The music featured this week, in order of appearance, is:


Our theme music is “Guatemala - Panama March” (by Heftone Banjo Orchestra), licensed under Creative Commons. 



See you next week!

PS If you missed #12, check it out here.

Caroline Crampton is web editor of the New Statesman.

Anna Leszkiewicz is the New Statesman's editorial assistant.