‘Government involvement’ never leads to lowered prices
The Tennessean
6.24.2010
After almost a month of repairs, the K.R. Harrington Water Treatment Plant is back in operation. Nashville residents can bathe and wash dishes normally. Now that the crisis has passed, it is useful to reflect on the economic lessons of government pricing and rationing. Let’s start with the basic facts.
 Robert P. Murphy
After the flooding in early May, the Harrington treatment plant was knocked out of service. This left only the Omohundro plant in operation.
This meant that the city could produce only 81 million gallons of fresh water per day, which it supplemented with five million gallons purchased from neighboring regions. But Nashville consumers normally use some 100 million gallons per day. This consumption drew down the city’s reserves to a precarious 37 percent by Tuesday of the flood week. This is why Nashville residents were told to restrict water use by 50 percent. If the city’s reserves had been depleted, Nashvillians would have faced the absurd combination of a devastating flood and a severe disruption in water service. The community surged into action. Radio announcers urged the public to conserve, while people posted helpful tips on Facebook and other sites. A hotline was established for residents to report neighbors or businesses using water inappropriately. The free market is the most dependable system Basic economics teaches that all this energy was unnecessary. When a good or service is provided by the private sector, the market price balances supply and demand. The government doesn’t need to micromanage its use, and citizens don’t have to spy on each other. In a free market, a sudden disruption in supply leads to a spike in the price. For example, a cold snap might ruin a large part of the tomato crop. This leads to a much higher price for tomatoes. Consumers are still free to buy as many tomatoes as they want, but because of the higher price they naturally cut back their purchases. The available tomatoes are rationed among those who really want them. Many people think that competitive markets work well for nonessentials, but government-regulated monopolies must provide necessities such as water and electricity. Yet this has things backwards: We should entrust the most important services to the most dependable system, namely the free market. In hot summer months, government-supported utilities routinely fail to deliver power to their paying customers. “Brownouts” are common in large cities, especially in California, forcing people to go without air conditioning on the hottest days. Residents are often asked to refrain from watering lawns on certain days. But when has anyone heard of hot dog companies or beer distributors running into similar problems? Indeed, they look forward to the seasonal spike in the demand for their products. Their mentality is completely different because, unlike government-regulated monopolies, they do not have a captive market. This institutional difference largely explains the different outcomes, in which households may have no power or water, but plenty of hot dogs and beer. Defenders of government-regulated monopolies object that a free market in water would make this essential service too expensive for the poor. Yet it is a curious argument to suppose that government involvement will make something cheaper. Our nation is about to test this theory with the new health-care legislation. I predict that the quality of care will decline while costs rise. The recent water shortage in Nashville wasn’t merely about postponed showers and loads of laundry. The city ordered car washes to shut down and these businesses lost millions of dollars. It’s true, even in a free market, the car wash owners might have shut down voluntarily if the flooding had caused the market price of clean water to skyrocket. But that is the point: We don’t know what would have happened, since the government dictated which uses of water were permissible and which were not. Most people understand that it would be folly to allow politicians to run restaurants, and they would be horrified at the thought of bureaucrats selecting their babysitters. Why do we consider it perfectly normal to let government remain in charge of our drinking water? Robert P. Murphy, a resident of Nashville, earned a Ph.D. in economics from New York University and is a senior fellow in business and economic studies at the California-based Pacific Research Institute. He is the co-author with Jason Clemens of Taxifornia, available on PRI’s website. Contact him at RMurphy@pacificresearch.org.
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