Monday, February 8, 2010

Privatization: The Solution to Houston's Water Problems

For some time it has been rumored that the city will need to raise water rates soon. Last week the city admitted that it is considering such a move. The Chronicle reported that rates could increase by as much as 14%. Councilman Ed Gonzalez was quoted:
The ultimate goal is to provide a sustainable water service for the community. It's one of the primary functions of city government. The system has been strained over the years. ... At this point I think we have to be open to everything.
Gonzalez is wrong on two counts. First, providing water service is not a function of government. Government's purpose is to protect individual rights, which means the freedom to take the actions necessary to sustain and enjoy our lives.

Second, the city won't be open to everything. I am very confident that the city will not consider privatizing the water system. And by privatizing I mean getting completely out of the water business--selling the assets and letting private businesses provide water service.

Water--like other utilities--is considered a "natural" monopoly. That is, the infrastructure required to provide water service is such that it makes more economic sense to have a single provider. In short, "natural" monopolies preclude a competitive marketplace.

Such arguments are based on numerous faulty perceptions about capitalism. One of those faulty perceptions is the need for competition in order to have a healthy marketplace. But competition is not an essential characteristic of capitalism--it is a by-product. The essential characteristic of capitalism is the recognition and protection of individual rights.

When men are free--when they are able to act on their own judgment without interference from others, so long as they respect the mutual rights of others--competition often does result. When men are free, they often identify a more efficient way to produce a product or service. When men are free, they often identify a better product or service. When men are free, they can act on that judgment by offering their products and services to others.

The proponents of "natural" monopolies claim that markets should perform a certain way, that there should be abundant competition. When the market fails to provide competition, they proclaim a market "failure" and insist that government must intervene.

That intervention invariably involves prohibitions on competition--if someone wishes to offer a competing service, he is prohibited from doing so. Which means, government prevents the very thing that it claims the market won't provide. Why then, are such prohibitions required?

When men are free, they often find innovative ways to provide the goods and services that consumers want and need. Entrepreneurs are far more creative and resourceful than any government bureaucrat could dream of being. As an example, consider the computer industry. The phenomenal advances made in computer technology have not resulted from government controls and regulations, but from freedom.

Admittedly, privatizing our water systems would be a complex undertaking. But building computers is also complex, and perhaps more so. We reap the practical benefits of the relative freedom in the computer industry--an abundance of choices and continually declining prices. The same benefits could be ours if we privatized our water systems.

4 comments:

Mo said...

the market failure notion is platonic rubbish. its still being espoused by orthodox economists who believe in "efficient market theory" that somehow the free market is supposed to supply everything to everybody equally.

Brian Phillips said...

I agree. They posit an ideal that has nothing to do with reality, and then demand government intervention when that ideal isn't realized.

Allen Lewis said...

I've often thought that you could simply spin-off ownership shares of the city water system (or trash collection system, local streets, etc.) to all the residents of the affected geographic area. Similar to what a public company does when it spins off part of its business into a stand-alone company. For example, all landowners (or residents, or registered voters, etc.) would receive 100 shares of this new company called Houston Water Company. Houston Water Company would consist of all the physical assets of the current municipal water system, along with all debt issued by the city that is backed specifically by water fee collection (revenue bonds).

This would allow residents who want to sell their shares of the company to do so (an essential part of private property ownership - the ability to dispose of your property). The people who wish to remain shareholders could vote for the new company's Board of Directors. Best of all, new entrants could enter the water industry.

The most contentious point would be how to allocate the shares. Unfortunately there is no silver bullet in that regard. If politicians are involved in the decision-making, the decisions will always be made on political grounds.

This is what I think the city of Houston should have done with the local roads in the Rivercrest neighborhood: give them all proportional ownership of their local roads, along with a proportional burden of the city's debt incurred to build/maintain those roads.

Brian Phillips said...

Allen-- I agree with your general point. However, rather than equal shares, I think that it might be more judicious to allocate shares based on past water usage, property value, or a combination.

This would tie ownership to the amount that property owners have paid in the past. Those who have paid more via water fees and taxes would then own more of the assets that they paid for.

As you say, coming up with a solution that is totally fair is probably impossible. But your suggestion is certainly in the right direction.