‘Government involvement’ never leads to lowered prices – Pacific Research Institute

‘Government involvement’ never leads to lowered prices

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.

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

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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